Dan is a recognized business growth expert for financial companies. For more than 20 years, he has been providing guidance and perspective to financial clients and thus helping them grow. In 2009, Dan was nominated by MutualFundWire as one of the Most Influential People in Mutual Fund Distribution.
In this interview, Dan comments on recent changes in wealth management, discusses threats, opportunities, and prospects that technologies bring to the industry, and shares his ideas about attracting millennials and calculating risk tolerance.
Q: Could you please tell me how you came to the wealth-management industry and what your connection to the wealth-management industry is right now?
Dan: Sure. For 20 years, I have been growing wealth managers and asset managers, a wide range of financial services companies, through different specializations, like marketing, public relations, and sales—distribution-type activities. My specialty is helping asset managers and wealth managers grow. I’ve worked with a lot of companies and have a lot of partners in the industry who refer clients to us because they trust us.
A lot of our clients are asset managers who want to sell to wealth managers. We’ve been connected to wealth managers aggressively by working with them directly, but also because our clients want to focus on getting their stories in front of wealth managers. We know wealth managers really well. We go to a lot of conferences where wealth managers, like Schwab or Morningstar, spend their time. We talk to them. We want to learn what’s on their mind, what’s keeping them up at night.
There’s a lot of changes going on in the industry with wealth managers. There’re some competitive issues, which have always been there. How do you differentiate yourself from wealth managers down the street? That’s a big challenge. How do you show your worth when there’s so many wealth managers that people can talk to? How do you grow your business when you really enjoy managing money for people but you don’t necessarily enjoy sales and marketing?
Finally, there are some additional competitive threats now. Some people call them threats, some people call them opportunities. Now you’re competing with FinTech-type companies. Some wealth managers are bringing the technology inside to have their own robo-advisor. Others don’t want to go there. How do you deal with these strategic questions that are coming up now in terms of growing your business, differentiating your business, keeping up with the times when FinTech is there?
Then there are also succession issues. How do you make sure that your firm retains its value when it’s time for you to start cutting back? Because you’re getting older and there’s younger advisors who might take over the business.
Those are some of the important issues that we’re involved in and that operate between the asset-management segment and the wealth-management segment. I think we’re connected to this industry. We’re a firm of about seven people right now. It’s a very fast-growing, one-year-old company.
Q: What are some of the changes you have observed in the wealth-management industry in recent years?
Dan: Let’s just start with the threat or opportunity of financial technology. Either companies are going to embrace it, or they’re going to fear it. There’s a lot of companies doing both. They don’t see it as something that can support their business; they see it as a threat. There are many high-profile robo-advisors, for example, and there are many robo-advisors that are behind the scenes supporting an individual wealth-manager’s business. They’re built as a way to compete for that low-touch client.
There’s a lot of wealth managers who are on the fence. They don’t know what to do with it—whether to fear it or deal with it and embrace it. I think that’s something that’s going to continue to change over time as technology plays more of a role in serving the clients, but also in the selection of investments. Anyway, FinTech is a big change.
I think another change relates to where the money is. A lot of financial advisors historically have targeted the older generation, people with money, retirees, or executives who are close to retirement. Now firms are paying more attention, targeting millennials. They’re also spending more time trying to communicate and engage their clients’ children because they want to keep the money in the future. I’m happy to see that there’re more firms trying to take that strategy seriously. In the old days, when your client died most of the money would leave very shortly thereafter. That’s another big change.
The other change that has happened in the last few years is that it has become so much easier for wealth managers to attempt to become thought leaders, to grow their business. The use of tech, the use of digital marketing, the use of videos, blogs, content, timely information—all of these things… sophisticated email marketing systems, social media. A lot of wealth managers are taking these strategies seriously as a way to gain new assets and also retain their existing ones.
Years ago, this was very difficult and expensive to do because financial advisors just didn’t have the experience or the time. Now, you can literally create a video on your iPhone, it’s easy. It’s easy to comment on the news and to be part of the news and talk about investing in financial planning topics. If you can get your story to the right people on a regular basis, you have a good opportunity to raise your stature and take your business to the next level.
The other piece of thought leadership is related to working with the news media. It’s all part of the same process, the same thought-leadership program. You can use technology to deliver your message, or you can try to get journalists to write about you and your thoughts on timely issues. Both of those strategies are really good, and more wealth managers are using them because they want to be able to get out from behind their desk and attract more clients. This is a great, low-cost way for them to do it.
“Generally, millennials don’t need people to tell them what to do. They don’t need conversations. If you can buy a coffee maker on Amazon, you can certainly build a portfolio on a robo-advisor.”
Q: Do you think that new technologies and possibilities provided by FinTech startups like robo-advisors can replace old-school financial advisors who don’t utilize these new technologies in their business?
Dan: Not all robo-advisors are created equal. I think it depends. It’s not the product, it’s the brand that is important. When you look at the successful robo-advisors, while the boutique firms started the robo-advisors, they’ve always had a very tough time attracting assets. While they were interesting and the media was writing about them, they weren’t able to gather very much in terms of assets.
When Schwab and Vanguard, for example, got into the business, either building it organically or acquiring one of the boutiques, they were able to drive assets and interest into it. This is a great concept for investors who want a low-touch, low-cost investing environment, but it’s not going to replace the typical wealth manager, where it’s more about high-touch, customization and advice.
The firms that are doing best, at least right now, are the full-service firms. Vanguard and Schwab own all of the assets. There’s a very small percentage of people that are going to the remaining independent robos. The firms who decided to build their own robo are only going to be able to attract assets as they attract qualified leads or build their brand or tell their story.
People are not flocking to it. Firms have to be very aggressive in telling their stories about the benefits of a robo-advisor. It’s got to complement their existing business strategy. I don’t think it’s going to put wealth managers out of business.
Q: You mentioned that financial advisors are trying to attract more millennials to start investing earlier. Do you think that with these new robo-advisor solutions companies will be able to increase the investing culture among millennials, of the younger generation, and attract them to start investing earlier?
Dan: That’s one of the benefits of it because generally millennials are able to buy things on the Internet. They don’t need people to tell them what to do. They don’t need conversations. They’re the Amazon.com generation. If you can buy a coffee maker on Amazon, you can certainly build a portfolio on a robo-advisor. That’s a good use. If you have a qualified young person, they might be more interested in not talking to a person and just dealing with your website to do everything.
I think it’s a good way to start. It doesn’t take a lot of time from the firm, and they’re going to start being able to engage customers earlier because of the technology. I do think that’s one of the benefits for getting into the robo business. Not seeing it as a threat but embracing it as a way to attract leads for the future.
“The market is just going to grow as financial advisors realize that they probably should be adding some sort of robo-capability to their portfolio services.”
Q: Some robo-advisor solutions are more geared towards business to business (B2B), while others focus on business to consumer (B2C). For example, Betterment and Wealthfront are focused on end investors. You just go to the website, start your account, create your portfolio and start investing. Basically, you don’t need to go to a human advisor. Do you think that in future, we will not need any B2B solution, and that B2C robo-advisors will totally replace B2B wealth-management solutions?
Dan: No, there’s going to be overlap. I don’t think anything is going to put anyone out of business right now. The B2C trend is certainly more visible because of the news stories and the publicity and the advertising and the Internet. But regarding B2B, I think wealth managers are not technology firms. They’re going to need some hand-holding and some people who know how to hook them up, how to build a system that works for them.
You go to Betterment or you can go to XYZ Capital’s robo-advisor, and how does XYZ’s robo-advisor compete with Betterment? Well, these companies are not going to build their robo-advisor software internally. They’re going to partner with somebody who knows how to handle the technology, who can handle the communication, who can handle the compliance and everything else. I think that the market is just going to grow as financial advisors realize that they probably should be adding some sort of robo-capability to their portfolio services.
Q: What features do you think are most important for a robo-advisor solution?
Dan: You’ve got the basic commodity ones, which are low cost, easy to deal with, the ability to be found in the first place. How do you stumble on Betterment or Wealthfront? You’ve got to find it, so we’ve got to have some sort of visibility and brand. Then also a quality investment process, whatever that means, but there’s got to be some brain inside the computer model that builds a reasonable portfolio. I think most firms do that pretty well.
I think there needs to be constant communication; really good, engaging content to keep the investor coming back, to keep the investor engaged with the process and the results. I think that’s where some of the internal, the business robos don’t do so well. Wealthfront or the equivalent, the Schwab, the Vanguard robos, they educate very well. For a firm who maybe outsources to robos to help attract millennials, it’s up to that firm to communicate with clients and prospects. Very often, they don’t communicate well.
Often, they don’t communicate well on the wealth-management side of the business. They just wait for referrals to come in. They’re not actively engaged with their clients, or they send out a quarterly newsletter that they didn’t even write themselves. It’s some newsletter that was written by somebody else, and they paid a low fee to push out something every quarter.
I think the most overlooked area for improvement of B2B robos is their communication strategy. It’s not just about having the account open with a client. It’s about engaging with that client on a regular basis with really strong content. That’s the area where firms fail.
You’ve got to communicate with your customers. You can’t just have somebody stumble on your website, put in $5,000, and never talk to them again. Not all wealth-management firms are good at that. You’ve just got to bring in that communication expertise to help them engage.
When you have clients who engage, you’re going from one client to many more, because if they’re engaged with you, they might refer their friends and family to you. They might give you more wallet share. A lot of good things can happen with increased engagement, and clients might not leave you so quickly if they don’t like the results or if they don’t like something that happens.
Q: Most of the wealth managers and robo-advisor solutions give you some kind of questionnaire, and based on the answers to it your risk tolerance is calculated. Do you think this is an efficient process? Do you think anything can be improved within this process—for example, using Big Data analytics to more precisely calculate the risk tolerance for each particular user?
Dan: A lot of firms do not divulge their formula for risk tolerance. It’s kind of a black box. You answer a bunch of questions, and then it comes out with an answer. The questions seem pretty standard. There’s really nothing that unique. There’s kind of 10 questions, A, B, C, D are your choices, and you fill in the blank. There are a couple of problems with that.
One is that you don’t know whether the client is answering honestly. You don’t see their body language. Either they’re not answering honestly because they don’t understand the question, or they want to be one way but they know they’re another way, and they’re giving you the wrong answer—“garbage in, garbage out,” so to speak. All of a sudden, they don’t reach their goals.
There’s one robo, Ellevest, that is pretty interesting. It’s a woman-owned robo-advisor, a woman-focused robo. It’s a high-profile one with all of those financial industry professionals. Their risk-management process takes into account many things, such as if you’re a woman you have a longer life expectancy. They do a good job of communicating what makes this robo different. It’s going to impact the results.
All other robos really don’t communicate anything about the process of your risk tolerance assessment and what that means for what your investment portfolio should look like. I think that it’s important to be able to communicate your differentiator of risk tolerance and to give it some thought, rather than just use the standard list of questions for people.
The wealth manager is asking you a lot of questions, and follow-up questions. That’s one of the benefits of a person. They’re going to ask questions, read your body language. The right answer may not be the first thing that you say. Robo-advisors are going to ask you questions, and they’ve got to get it right. There’s no body language, no follow-up questions, and no proof that you’re telling the truth.
It’s very important for these firms to enhance their process for determining the risk that’s appropriate for a client.
“It’s one thing to create a computer model in your office, and it’s another to really understand the marketplace.”
Q: Is it important for business people to have deep understanding of the technology part of the business, and should software engineers have more knowledge in capital markets to be able to leverage the technology more efficiently for the wealth-management industry?
Dan: I think it helps. I think somebody with just a generic technology background is not going to understand every nook and cranny of the wealth-management business. They’re not going to understand the trends; they’re not going to understand best practices. Can they build you a robo-advisor? Sure. Is it going to have best practices and everything else in there? Probably not.
I think it makes sense to find a specialist in the industry who has built a good product, who can talk about what you’re trying to accomplish. The goal shouldn’t be, “we want to build a robo-advisor.” The goal should be, “we want to enhance our business with a robo and to have an educated conversation about it.”
There’s got to be chemistry between the wealth-management firm and the service provider. Can you do it cheaper by hiring a generalist? Probably, but I don’t think you’ll get the results that you want.
Q: What is the best way for software engineers to obtain knowledge about financial markets, wealth management, and portfolio management to enable them to be better experts in this field?
Dan: There are many industry publications that cover the financial advisor business. Wealth Manager, Financial Advisor, Investment News, Financial Planning—there are more. Very often, it’s very smart for the technology provider to be reading these publications to understand the issues that are most important to the wealth-management firms.
It’s important to understand your client. It’s not enough to just understand how to write a computer program. What keeps the financial advisor up at night? What are their problems? How can you save them time? How can you help build their business? All these publications are writing about these issues. So number one is reading all of these magazines to stay up to date on what’s happening within the industry, who’s doing what, what robos are being launched. It’ll give you a lot of insight into the industry.
Once you become that expert, then don’t just read the publications but try to be in those publications. Start talking to the journalists at Financial Planning. If they wrote an article on a robo-advisor, call them up, let them know that you liked the article, you agree with what they said, you disagree with what they said, or here’s a way to further the story, to take the story to the next level. Try to build a relationship with these journalists so you can be in the story. All of a sudden, as a software provider who builds robos, you might become more visible and more of a thought leader yourself.
I would also say, in addition to the news media, you have to spend your time where wealth managers spend their time. If they spend their time at conferences, you might want to go to these conferences and network with financial advisors. Have a drink with them late at night and try to figure out what makes them tick and what keeps them up at night and all that. Literally ask them questions because it’s one thing to create a computer model in your office, and it’s another to really understand the marketplace.
I think anybody thinking of building a robo-advisor should partner with a specialist in the industry.
Q: Which companies do you think are the most innovative in the WealthTech and robo-advisor fields?
Dan: I’m a fan of Ellevest. I’m a fan of what they’re doing, and I think it’s very unique in having a niche of women and to really design their risk assessment towards women and all of their content towards women. I really like that. I think the others are kind of generic.
They’ve got the first-mover advantage. They’re connected to Schwab and Vanguard, which are doing well because of their brands. They have distribution.
I think Ellevest will be the only name I give you because they’re in a unique situation. They were founded by serious women in the industry. They’re not techies, they’re money managers. I think they bring that background and their relationships to the table. Very impressive.
Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also author of the WealthTech Club blog, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.