Portfolio Management, Reconciliation and Accounting – Some Thoughts on Outsourcing for Financial Advisors

Portfolio Management, Reconciliation and Accounting – Some Thoughts on Outsourcing for Financial Advisors

During the last few weeks, I’ve had the opportunity to attend both the Orion FUSE event and the SS&C/Advent Deliver Conference. The two events could not be more different. Orion FUSE is primarily a hackathon that brings together software programmers from Orion partners to create integrations with the Orion platform. SS&C Deliver 2016 was my first opportunity to attend an SS&C Conference since their purchase of Advent/Black Diamond. Although very different in nature, both provided me with an opportunity to reflect upon the state of outsourced portfolio management throughout the industry, but particularly within the independent RIA space.

It occurs to me that portfolio management and accounting is an area within our industry ripe for disruption. There are a number of reasons for this. Perhaps the greatest one is the commoditization of the investment process. Digital advice platforms have drastically reduced the cost of constructing, maintaining and rebalancing of basic diversified portfolios. I said basic because most of the low cost digital solutions rely primarily upon low cost ETFs as the building blocks of these diversified portfolios.

Many advisors using some of the more robust platforms available, such as Black Diamond, Envestnet and Orion, tend to construct portfolios from a wider array of asset classes that require more robust accounting and reporting solutions. These platforms offer more sophisticated capabilities and robust service/support, but they tend to be very costly when compared to the other technologies required to run a successful RIA firm.  Now, if the majority of independent RIA firms added alpha after expenses and taxes, higher costs might be justified, however, in aggregate, that is just not the case. The vast majority of advisors I speak with readily admit that they struggle to add alpha after taxes and expenses. In addition, they tell me that they do not consider investment performance to be part of their value proposition. I suspect that this imbalance between price and perceived value will alter the status quo sometime in the near future if it is not addressed.

In addition, it is likely that some of the leaders in the field will come under increased competitive pressure in the future. Schwab has announced that their next generation portfolio management solution, Schwab Advisor Portfolio Connect, will be released soon, possibly as early as the Schwab IMPACT Conference next month. We continue to hear chatter that other RIA custodians are building their own portfolio management and accounting solutions. These solutions initially will only be viable for those firms with a single custodial relationship, but the promise of very deep integration with the custodial platform and potential multi-custodial capabilities in the future could prove enticing for some advisory firms.

The good news for the third party portfolio management vendors and those who use them is that these firms appear to be aware of the challenges that are likely to threaten them, and they are already responding. All appear to be trying to reposition themselves as a platform as opposed to applications. They are all offering deep integrations with partners. All offer value added services, and continue to add more, in an effort to remain competitive. As is the case in the RIA custody field, the firms each appear to be taking a somewhat distinct approach to differentiation.

For some time now, Evestnet/Tamarac has been pursuing an integrated, all in one approach. They want to be your one-stop shop for all your technology needs.  Their Advisor Xi deeply integrates quality performance reporting, billing, rebalancing, and trading software with an online client portal and an enterprise-level CRM. With more recent acquisitions such as FinanceLogix financial planning software, Yodlee for account aggregation and the purchase of Upside, a digital platform that resulted in the release of Advisor Now, Envestnet appears to be uniquely positioned to offer the full array of core products and services that independent RIA’s need. For those firms looking for a single provider, Envestnet looks attractive.

Orion’s approach is diametrically opposed to that of Envestnet. Much like TD Ameritrade in the custodial space, Orion encourages integration with all relevant potential partners. Their developers do a great deal of coding to make their system easy for partners to work with. They have built innovative tools such as an open source client portal, an alert API so that alerts can be shared across applications, and a widget API so that widgets from Orion can be displayed in the portal of partners and so that widgets from partners can be displayed within Orion. Due to the open nature of their system, Orion clients can choose from a wide variety of financial planning software providers, CRM providers, etc. Orion has also produced a number of their own innovative tools that they make available to their advisors.

Black Diamond’s approach to integration falls somewhere between the two extremes above. The firm offers integration with approximately 35 third party vendors. In addition, in an effort to provide a seamless integrated experience, the firm just announced two “unified experience” integrations: one with Advizr, the other with Riskalyze. In effect, these are “most favored integration partners.” The idea is that Black Diamond clients will be able to purchase these applications from Black Diamond, and receive a deeply integrated experience that feels like you are working within a single application. The service experience will also be unified. Advisors will have one bill to pay and one service team that supplies support. The full package is expected to be available in the first quarter of 2017.

In addition, Black Diamond continues to roll out the third generation of their platform. It is the best looking Black Diamond offering to date, as well as the most functional and easy to use. Enhancements include cutting-edge client reporting capabilities, a report builder that enables advisors to build their own custom reports on the fly as well as business intelligence and firm reporting dashboards. The new reporting engine includes modern, flexible report graphics and a report builder that will enable integration of both Black Diamond content alongside content from Advizr, Riskalyze and other outside vendors into a unified reporting experience. Usability appears to be excellent.

In addition, SS&C has unveiled Black Diamond Link. It essentially extends all of the functionality above, including the reporting, integrations and business intelligence of Black Diamond to Advent APX users who need it. Black Diamond Link will be available for Advent AXYS customers soon.

The bottom line is this: Expect competition within the field to stay heated in the coming months. There is a possibility of some price compression, however it seems equally likely that firms will compete primarily by offering platform services, deeper integrations, superior reporting, enhanced client and advisor portals, increasingly sophisticated business analytics and other value added services that advisors crave.

Joel Bruckenstein
Joel Bruckenstein
Joel P. Bruckenstein, CFP®, is Publisher of the T3 Tech Hub (formerly the T3 newsletter) and the producer of the Technology Tools for Today (T3) Advisor Conference, the only annual technology conference for independent advisors, as well as the Technology Tools for Today (T3) Enterprise Conference. He also hosts other technology summits in partnership with thought leaders in the financial services industry (e.g., Brian Hamburger of MarketCounsel) and his own by-invitation-only fintech summit every summer. In 2020, Bruckenstein will produce for the first time a new one-day intensive called T3 Cyber University. Bruckenstein is an internationally acclaimed expert on applied technology as it relates to the financial service industry. He is the co-author of three books: Virtual Office Tools for a High Margin Practice, Tools and Techniques of Practice Management, and Technology Tools for Today’s High Margin Practice. Bruckenstein’s monthly technology columns appeared in Financial Advisor magazine and Financial Planning magazine for many years. In addition, he works in tandem with industry influential Bob Veres, publisher of Inside Information, to produce an annual technology survey for the financial planning community. Bruckenstein accepted the fifth annual Leadership Award bestowed by Bob Veres' Insider's Forum, a conference that brings together the leading figures of the financial planning profession during a main stage presentation at the Insider's Forum held September 6-8, 2017 in Nashville, TN. Bruckenstein has for more than twenty years advised financial service firms of all sizes on improving their technologies, processes and workflows. For more information about Joel Bruckenstein and the services his firm offers, please visit www.JoelBruckenstein.com.

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