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Indie Advisors Banking on Credit, Cash Management

Independent advisors are gaining ground on their bank-based peers when it comes to loans and cash management tools, improving the client relationship—and keeping those assets closer to home.

Last month, Orion and Focus Financial Partners announced that they will be providing independent financial advisors with access to a comprehensive suite of banking services, facilitated by a network of 15 financial institutions. A few weeks later, Envestnet | MoneyGuide and MaxMyInterest revealed their own integration, with yet another yield-boosting cash solution for advisors, which came nearly a year after Envestnet announced the public availability of its Credit Exchange lending platform. Goldman Sachs was even earlier to the game. In 2017 it launched a securities-backed loan platform called GS Select for advisors that’s now used by over 150 firms, proving advisors the ability to source loans for clients without losing touch with the assets.

While the products, services and ideal advisor for each may differ, it is increasingly clear that a variety of tools to handle banking services like cash, credit and liabilities management for clients are no longer the sole domain of the wirehouses and big brokerages. In fact, the space between banking and independent wealth management is growing increasingly blurry, with registered investment advisors gaining the capabilities and service offerings that were once only in the domain of wealth managers inside banks and full-service firms.

Growing accessibility, changing customer expectations and the subsequent response in tech development has accelerated the trend. 

Better access unlocks billions

The ability for advisors to access tech-enabled lending platforms is one of the most important barriers to fall between independent and wirehouse advisors, according to executives at Goldman Sachs. Recognizing the demand for security-backed loans and other services among the clients of independent advisors, the investment bank launched GS Select in 2017, making the platform available to more than 50,000 advisors across more than 150 firms, according to Anthony Rochte, managing director and head of Goldman Sachs Private Bank Select. In 2020, those advisors used GS Select to facilitate more than 3,000 loans, totaling more than $3 billion in originations, he said.

Lending platforms designed for independent advisors are “one of the most important pieces, alongside planning and trust services,” that help RIAs and independent broker-dealers compete with their wirehouse rivals, said Andrew Kaiser, head of the Goldman Sachs Private Bank.

“Estate planning and financial planning and banking are all coming together to the independent advisor space,” he said. “And independent advisors are really using these services [while at the same time] advisors are breaking away from wirehouses.”

Commonwealth Financial Network makes lending solutions available to its approximately 2,000 advisors through GS Select and TriState Capital. Executives say that today’s loan-facilitation platforms are not only easier to access than they used to be, but the loan application process is far faster and more convenient than it might be at a bank, said John Bohs, SVP of brokerage operations at Commonwealth. Around 200 advisors have used the loan program as of last year and the total number of outstanding loans grew by 88% compared to 2019, according to the firm. 

“It’s not too arduous. A lot of it is done online, making it an easier experience for clients, as well as a more timely experience than maybe going into a regular bank,” he said.

GS Select has straight-through processing for its "simple securities-based loans," according to Rochte. More complex loans, like refinancings and entity borrowers receive assistance from the lending team.

Advisors associated with Commonwealth don't get paid for assisting with the loan, said Bohs. But one of the indirect ways of receiving payment for offering the lending service is that assets are not liquidated and moved outside of the advisor's management, so advisors charging an AUM fee won't see a drop in revenue. 

Commonwealth also mandates that assets used as collateral for a loan are held on the firm’s platform. Offering a loan “doesn't increase [the advisors’] AUM per se, but it offers the ability to…gather more of the client's assets,” said Bohs.

In that situation, Commonwealth has incentivized its advisors with clients who need a large loan, or better terms, to capture the client’s heldaway assets and move them under the advisor’s own management. Indirectly, facilitating a loan provides cover for an advisor seeking to bring in greater wallet share.

Non-Commonwealth advisors using the GS Select platform have the option of receiving revenue share from the lender—essentially a fee for facilitating the loan, said Kaiser. But advisors on that platform can opt out of the revenue share, reducing the rate of the loan on behalf of the client. Advisors are evenly split between those who opt to receive a revenue share and those who put that money back in the pocket of their client, he said.

A rewired investor

The intersection of wealth management and banking service isn’t exactly new. Merrill Lynch was offering cash management accounts back in 1978, with Fidelity following in 1983 and discount brokers catching on in the early 2000s. By 2019, nearly two decades later, automated investing platforms Wealthfront and Betterment had both added their own cash solutions to their platforms.

Coupled with the tech-accelerating effects of the coronavirus pandemic, today’s clients have greater expectations across the industry, said Eric Clark, CEO of Orion. The siloing of banking and wealth management no longer flies, he said. Clients want their complete financial picture, neatly presented in one frame.

“We're dealing with, in essence, a rewired investor,” he said. Under the influence of non-wealth management related technology, investors from Millennials to Baby Boomers no longer find the separation of wealth management and banking to be acceptable, he said.

“They just think differently about advice,” he said. “We're using tools like DoorDash, Instacart—these types of technologies that create the ability for us to bring things together in ways that we haven't historically. [Investors are] expecting the same thing from banking and the investment advice arenas.”

“This convergence of banking and wealthtech is something that you're going to continue to see evolve over time,” he added.

Today's advice business has changed dramatically from the 1970s too, with many advisors and firms leading with financial planning, which is more fruitful and effective when liabilities, not just assets, are addressed. After Envestnet bought MoneyGuidePro, it set about intertwining it with its other offerings. Today, the planning capabilities of MoneyGuide inform not only standard financial planning, but facilitate the sales of insurance and credit products, with the advisor as the intermediary.

“What does that mean for the advisor?” asked Andrew Stavaridis, executive managing director at Envestnet. “The relationship is stickier. The client isn't going to other banks or other advisors for their solution. [The advisor] is able to keep them there.”

At Envestnet, some lending products and providers offer a revenue share for the benefit for advisors and about 70% of advisors using the Credit Exchange opt to receive remuneration via revenue share. Legally, residential mortgages do not provide remuneration, although a spokesperson for the firm noted that that could change over time. Regardless of the revenue share, all advisors would benefit from earning the client's goodwill and a deeper relationship, said Stavaridis.

Trust the tech

“As [Banking-as-a-Service] solutions mature and more bank technology providers enter the space, the options for wealth management firms and their service providers to offer compelling banking services will expand,” according to Sophie Schmitt, a senior analyst at Aite Group, in her recent report, Banking in Wealth Management: Cash Is Still King. “Aite Group expects more wealth management firms of varying sizes to leverage these services to deliver more holistic advice and solutions to clients of all wealth levels.”

Not only have banking capabilities effectively leveled the playing field between independent advisors and their wirehouse and brokerage competitors, they made independent advisors better equipped to serve their clients, according to Rudy Adolf, CEO and founder of Focus Financial Partners.

Lending “is where the wirehouses are in a highly disadvantaged—in fact, conflicted—position,” said Adolf. “All they can sell is their own products. They may not be the best—in fact they aren’t the best—lender if it's a commercial loan or if it's an aircraft or a boat or insurance financing.”

“Most lending is becoming more and more specialized because of the complexity of the underwriting,” he added. His firm offers advisors access to a network of banking partners under a subsidiary called Focus Client Solutions (FCS). Last year FCS advised, placed or helped negotiate approximately $1 billion in loans and other credit structures, including securities-backed and insurance premium finance lines of credit, commercial and business loans, residential and commercial mortgages, and air and watercraft financing, according to Adolf. Of its 71 partner advisory firms, 18 are “active users” of the service.

Certain independent advisors have lending capabilities far more powerful than even many clients realize. Within their advisor-facing credit portals, tech providers are able to use clients’ aggregated account data and other financial proxies to help lenders make decisions on creditworthiness. Presently, remuneration for providing the lending service is wrapped into the overall wealth management fee the client is charged, said Adolf. In the future, however, he expects some advisors will receive a revenue share for certain products. (Legally, residential mortgages do not provide a revenue share.)

Advisors are helped by specially trained bankers with "deep experience...across multiple sectors" according to Tina Madon, who heads investor relations and communications at Focus. As the firm's mortgage business comes online, its specialists will have all necessary licenses, alongside the mortgage operating entity. Securities-backed loans are processed digitally, from front to back. "All others require varying levels of guidance to the client," she added. 

Focus, Goldman Sachs and Envestnet all noted that the personnel working alongside their advisor technology is crucial to operating smoothly. Commonwealth uses Goldman Sachs’ platform and Orion has teamed with Focus to offer its advisors access to the Focus credit subsidiary later this year. While all firms say they employ specialists to curate their lenders, separating their offerings from a lowly lending bazaar, the true value of these intermediaries is that they're not just ordinary bankers. They understand the specific needs advisors have when facilitating loans on behalf of their clients, and they know how to drive technology to quickly and efficiently get credit to advisors' clients.


Whatever it takes

Independent advisors may not be comfortable as bankers when dealing with loans, but as the “personal CFO for families,” they should know the right people to call when anticipating their clients’ needs, said Adolf. The Focus program is intent on scaling its program to get even better terms and products for its advisors through increased purchasing power. The firm is also developing trust and insurance solutions.

For its part, Envestnet is adding products to its platform. Securities-backed lending was “tablestakes” for the firm, said Peter Stanton, CEO of Advisor Credit Exchange, which helps Envestnet run the Credit Exchange. Now Envestnet is turning its attention to adding residential real estate as the “fast follow.”

“If an advisor is going to start talking about lending, inevitably, the advisor needs to be able to provide resident real estate lending, because it’s the number one borrowing need of the people in this country,” he said.

Goldman Sachs also sees the “potential” for more wealth management inroads in the traditional world of banking, according to Kaiser. “The potential exists to add other banking products, loans and cash management products, like deposits,” he said.

“Advisors are looking to become more relevant in the future,” said Stavaridis. “There's fee compression. The advisor marketplace is shrinking.”

Advisor-facilitated cash management, through powerful banking-like technology providers and their specialized human partners, offers a way forward. “As time goes on,” he said, “this is how advisors are going to grow their book of business.”

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