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Robo Advice, Integration: The Future of Custodian Technology

Market pressures have forced clearing firms and RIA custodians to morph into technology providers in order to survive.

Increased regulatory requirements have led firms to invest in providing support tools, and the rise of digital advice has pushed them toward integration opportunities. As these firms see more of their services become commoditized, technology is now a major differentiating factor for advisors deciding where to custody client assets.

A new report from Aite Group examines these market forces as well as the unique ways firms are responding. According Bill Butterfield, a senior analyst at Aite and author of the report, custody and clearing firms are in a technology arms race that is changing the way traditional advisory services are delivered.  

In his report, Butterfield said advisors want to really want to see improved integration, both with third-party applications and across their desktop.

“Financial advisors are no longer satisfied with disparate applications that do not communicate with each other, yet they want to be able to choose certain elements of their technology stack,” Butterfield wrote. It isn’t just about single sign-on, but real-time, bidirectional data sharing. “This is especially important for advisors doing business on multiple platforms to achieve a client-centric view. Vendors and service providers alike must respond by facilitating an integrated technology ecosystem as opposed to point-to-point connectivity.”

Though firms are all taking different approaches with technology, Aite Group’s research identified some common trends. One is a move away from paper-based account opening to attract digital advisory clients and full-service firms looking to roll out a robo advisor. Aite believes that paper-based account opening may be gone completely in five to 10 years.

Client portals are now front and center for advisors thanks to robo advisors, and multiple firms are making investments in this area. TD Ameritrade recently overhauled the user interface on its AdvisorClient portal, Fidelity is integrating eMoney Advisor’s client portal into its own offering, and Pershing is integrating MoneyGuidePro into NetXInvestor.

Custody and clearing firms are also ramping up practice management capabilities, with Fidelity and Pershing both notably rolling out new analytic dashboards to give advisors access to dynamic reports and interactive data. And three of the six clearing and custody firms examined by Aite are developing new advisor workstations.

At the top of everyone’s mind is supporting an open-architecture technology environment. According to Butterfield, this is the wave of the future, especially as advisors become increasingly multi-custodial and want to view their entire book of business on one screen.

“As clearing and RIA custodian firms race to check the box with leading third-party vendors, the differentiator will increasingly revolve around how well the vendors work with each other, not simply with the custodian’s technology,” Butterfield said.

TD is ahead of the game in this area with Veo, Pershing recently announced the opening of its APIs (application programming interfaces), and Apex Clearing touts the flexibility of its open architecture system to create new features (like the ability to fund brokerage accounts with a debit card in response to millennial demands).

And, of course, there’s robo advice, which Aite suggests every custody and clearing firm should be pursuing. Charles Schwab launched its own proprietary offering, Pershing is offering a choice of four different providers, LPL is working with BlackRock’s FutureAdvisor, and Fidelity recently ended a partnership with Betterment Institutional to develop its own solution. TD’s Veo workstation integrates with most robo advisors on the market, and Apex’s open platform makes it possible for independent RIA’s to plug-and-play the robo advisor technology of their choice. Apex also custodies assets for both Wealthfront and Betterment.

Going forward, Aite believes the largest firms will continue vertical integration in order to own the entire value chain.

“One of the best examples of this is Schwab’s Institutional Intelligent Portfolios for RIAs,” Butterfield said. “As a result, Schwab owns the entire suite of services from front to back: the asset management, the distribution, the clearing and the custody, all the way to the investor.”

Butterfield also believes that the firms that can best facilitate integrated technology will be in position to win the most assets, and even firms building proprietary technology should still support third-party solutions.

Technology vendors will also have to realize they are competing not only with each other, but also with the custody and clearing firms. Fintech companies and TAMPs (turnkey asset management programs) will have to focus on their value add and strike strategic partnerships in order to survive. 

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