Apex Clearing, the clearing and custody firm for a large number of standalone “robo” investment platforms, was formed in 2012, after its financial backers bought 350 clearing and correspondent clients from Penson Financial Services. Executives at Apex deliberately culled the client list down to under 100 to focus solely on online brokerages and digital advice platforms, including Robinhood and Betterment. The firm now serves about 200 clients.
“Lots of private equity, lots of venture capital money was starting to drive into wealth management, largely into these original robo advisors,” Apex CEO Bill Capuzzi said in a recent interview with Wealthmanagement.com. “And so we were the port of call for any new fintech startup that was looking to disrupt the old way of managing wealth, whether that’s online brokerage or passive investments.”
But in just a few short years since, the automated advice platform space has gotten crowded. Venture capital investors have moved on to different initiatives. Consider that Apex added about 30 fintech startups to its platform in 2015, 25 in 2016 and less than 25 so far this year.
So Capuzzi and his team are pivoting toward the enterprise advisory space, looking for firms that want to build out their own digital advice platforms. WealthManagement.com sat down with Capuzzi to discuss the current state of digital advice and how a robo-focused custodian can find new business among human-powered financial advisory firms.
WealthManagement.com: Advisors have historically feared that robo advisors would take market share from them. How has that attitude changed?
Bill Capuzzi: What’s happened over the past year is that the broader advisory community has embraced the concept of digital advice, and has started to add it as part of the arsenal. And the reason for it is twofold: Number one is, obviously, to create a better connection to their clients’ kids, grandkids, to create a way to connect with the younger millennial generation through technology. More importantly, and something that I think is under-discussed in the industry, is digital advice is almost a requirement for these advisors as, you know, fee structures continue to decrement, and, you know, these advisors look for ways for them to become more efficient.
It really is around creating a full digital experience that can kind of run the continuum from the 25 year old who wants a fully automated solution that has $50,000 in an account, all the way up to your ultra high-net-worth clients, where that digital solution is really in the hands of the advisor and not necessarily pushing a robo solution out to the end client.
So what we’re seeing now is that these larger advisors are looking at digital wealth as a sort of arrow-in-the-quiver, so to speak, and when they're looking for this digital solution, the Apex name keeps coming up, largely because that’s effectively all we do.
WM: What products and services are you providing to the robo advisor?
BC: There’s a lot of talk about the front ends—the CRMs, the rebalancers—all these kind of front office tools. There’s very little talk about the sort of differentiation among the custodian solutions specific to digital advice, and our focus is really around automating things, like account openings.
What we do is we take the information, and we pass it a sophisticated rules engine. We check to make sure Peter is who he says he is, and to the extent that he passes the rules, we’ll open that account as fast as you can type that information in, without any paperwork, no DocuSign, no two-day hold period; the account is opened in real-time.
We hold the asset, and so that last mile, last quarter-mile of opening the account and funding the account and transferring assets from one custodian to another—it matters and there is a huge differentiation between those that really embrace technology and those that don't.
WM: So Apex’s technology is underpinning the advisor’s?
BC: We have created a really sophisticated series of APIs that allow for those platforms to run super efficiently. So if I can do it for Robinhood or I can do it for Betterment or Stash, we can then transition over to the larger advisor—for instance, the HighTowers, the United Capitals—and provide that same experience across their entire client base, whether it’s a robo solution or the solution where they want their actual advisor to control the client experience.
WM: Are these advisory firms shifting all their assets to Apex or just some?
BC: It’s big and scary for a bunch of these guys to make that move, especially to the David and Goliath here, all right, Goliath being (for example) Fidelity and David being Apex. There are some of those that are happening, where an advisor is actually shifting their book over to us. The second, probably more prevalent, is that firm where they’ll leave their incumbent assets at Fidelity. They’re building out this dual custodial relationship with Apex. The traditional, so to speak, advisory business is sitting at the incumbent, and their digital solution is sitting at Apex, and the plan is for them to sort of right-size the two.
Many of the enterprise advisors that we want have decided that they want to build their own platform, that they want to control the client experience. They’re building their own platform, and the reason why Apex is a really attractive partner is because we have this really sophisticated API stack that connects account opening, funding, trading, transfers, right down the line of all of those sort of custodial functions.
WM: What are the most successful robos doing differently than the ones that have had more trouble gaining traction?
BC: Let’s take Robinhood as a really good example. They democratized investing. I think it holds for Stash as well, which is more passive, and Robinhood, which is more active; they’ve significantly decreased and/or eliminated all of the classic barriers to entry.
Here’s a story to illustrate my point: Betterment had this program with Uber, and what they did is they created this ability for Uber drivers to take a portion of what they made and fund a Betterment account.
I take Uber all the time, and I was in the back of a car and talking to the driver, and he asked what I was doing and I told him. It didn’t really make sense. I said well, “Did you ever see that thing about Betterment?” He’s like, “I saw something, but I didn’t know what it was.” I said, “Well, what do you do with your money?” He’s like, “I just put it in a bank.”
So we pulled over on the side of the road, and we opened a Betterment account, and he funded the Betterment account. For the first time in his life, at 40-something years old with two kids, he had his first investment, and it was just a breakthrough. We are eliminating these barriers of entry, because the concept of him filling out some paperwork and not understanding some things or where the money goes; what a Stash, what a Betterment, what a Robinhood have done is educate the public on how it works.
WM: Will we see a lot of consolidation among the robo platforms?
BC: Not yet. It’s coming. What we do see is firms getting into the business and then going out of business. We’re starting to see the folks that came out in 2014—they just sold their clients that they had, or they just literally went out of business. But there’s no shortage of new entrants that are trying to take advantage of some niche in the market.
WM: Some of your digital advice clients are business-to-business, while others are direct-to-consumer. Is there ever a tension there?
BC: We enable both. They’re at each other’s throats, but at the core, our job is to effectively act somewhat like Switzerland and provide this great solution set.
WM: What’s the next evolution in digital advice?
BC: Now we’ve digitized this thing, and it’s efficient. The next part of the evolution is really around—and take a page out of the hedge fund world—performance. How does one sort of digital solution differentiate from the others? It’s going to be around performance, and that’s starting to come. But right now there’s still this sort of shiny red ball in the corner—it just looks different than the old fashioned way of investing.
This has been edited for clarity and length.