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ScratchWorks: WealthTech Hopefuls Pitch RIA Investors

The third season brings three tech startups in the advisory space trying to solve hard problems and convince a panel of RIAs for real investment; our wealth-tech columnist sketches out the competition.

The RIA FinTech accelerator ScratchWorks is wrapping up its third season, and what a season it has been.

Watching the first three episodes (of four), I was happy to see the endeavor continuing to mature and come into its own.

The startups involved are engineering- and developer-intensive and span areas as diverse as a from-scratch RIA tech stack provider (pun intended) to a real estate investment platform, and an ESG investment analysis tool being built specifically for the advisory market.

Five of the six original investors/judges have returned and include Marty Bicknell, CEO of Mariner Wealth Advisors, John Eadie, CEO of Covenant, Jon Jones, CEO of Brighton Jones, Michael Nathanson, CEO of The Colony Group and Shannon Eusey, CEO of Beacon Pointe Advisors. This is the only fintech competition in the wealth management space where entrepreneurs make their pitches for real dollar investments to actual investors and advisors who are in a position to benefit—or not—from the technology.

I will be the first to say that I’m a harsh critic. I cringed and rolled my eyes when the first season was announced, its format an homage to the television show Shark Tank.

Today I say to advisors who may feel the way I did, just go with it, it’s fun and informative. Each of the three competitors is attempting to simplify a problem that at least some advisors struggle with daily. 

Having worked for a couple of startups myself, one in Silicon Valley and the other in New York, I think advisors will enjoy peering into the minds of the entrepreneurs (two of them former advisors) who share their inspiration and goals as well as the road map ahead. Advisors will also find the pointed questions, insights, pans and occasional lauding of the founders by the investor/judges entertaining and insightful.

As someone who has spent a decade as a technology go-between and translator for advisors and vendors, the judges do not always "get it," but that in turn motivates the founders to perform their own, at times, shaky improv to clarify, which does provide some needed tension.

Host David Canter, head of the RIA segment for Fidelity Clearing & Custody Solutions, does yeoman's work serving as an umpire and moving things along (it is clear he has spent plenty of time onstage, though most advisors will know him from the conference stage).

Episode One: Lifeworks

Many advisors will relate to Ron Bullis and the Lifeworks origin story.

He departed the advisor force of a major insurance company after a decade to start his own RIA, Lifeworks Advisors, in 2016. He and his co-founder soon discovered the patchwork that is advisor technology, one silo after another, applications that—despite APIs connecting them—failed to form a cohesive, seamless whole. They found both the client and advisor experience “disconnected.”

They sought something that was client-driven, seamless, immediate and intuitive.

“If clients can get that with a [direct-to-consumer] roboadvisor, why can’t they get it with a traditional advisor?” Bullis said.

He and his partners decided that starting from scratch with a modern codebase they could build something far more consistent, efficient and cohesive, and the Lifeworks platform was born (keep in mind that an online search will bring up quite a few other startups and businesses with that name, many in the health care realm).

I was incredulous that anyone in 2020 would endeavor to build an advisory platform—they call it a digital ecosystem—completely from scratch. So, I arranged a demo with Bullis to grill him myself, and sure enough, he has hired an outsourced team of almost 20 developers in Eastern Europe.

So far the team has built the digital account opening system (with a mobile version), a fully client-controlled billing portal that accepts credit cards and supports ACH transfers, as well as account aggregation that relies on Envestnet | Yodlee. And Bullis and his team have developed the features to fulfill the role of a traditional CRM system.

That last is one area the judges had difficulty with and an example of where Bullis had to make clear, during his pitch, that what they are building does not fit into the traditional advisor tech paradigm.

In a nutshell, when the RIA industry launched no one could yet foresee, with the then state-of-the-art technology, the big picture Bullis envisions. Starting more than 20 years ago, customer relationship management, as it did for many other industries, became the hub and repository where client data was kept. Today, CRM is still often the hub of most advisors’ workflows.

The vision with Lifeworks is that the data is not kept in some central piece of software; it goes wherever the advisor needs it for the given task she or he is performing (whether portfolio management, or planning, etc.). Lifeworks has been built from the ground up to be cloud native and is hosted on Amazon Web Services.

Currently, the firm has 350 client households, approximately $100 million in AUM on the platform, and the founders have themselves invested $1.5 million of their own money thus far.

Bullis and his team are seeking $1.8 million in capital for a 6% ownership stake in the company. They plan to use that capital to continue building out the platform, including its more complex financial planning features, as well as portfolio management and to hire lead stateside developers in key areas.

Episode Two: Act Analytics

There has been so much written about ESG (and SRI before it) that I could almost believe it was already ubiquitous, “permeating” every level and sector of the investment industry.

Mike Unwin, co-founder and CEO of Act Analytics makes the case that it has “permeated the institutional world…pensions…pension consultants…” and “trickled through asset management” during his discussions with the ScratchWorks investors.

His small firm is building the killer application—my words—that will allow advisors and “wealth managers to have value-based conversations with their clients using a proprietary ESG scoring methodology” and bring “sustainability mainstream.”

Built on a proprietary algorithm, the application attempts to remove a lot of the complexity found in currently available tools available to advisors. As is brought up more than once, his co-founder Zachary Dan (not named in the show), a quant, has a master's degree in computer science and an undergrad in aerospace engineering, a rocket scientist in other words.

“We’ve created software, which is really easy to use while their clients are in front of them or while on the phone or to be able to look at their investments not only on the single security level like Sustainalytics or the fund level like Sustainalytics and Morningstar but also at the portfolio level,” said CEO Unwin.

“So, advisors can integrate their portfolio and look at it quickly, but also do a values-alignment which is completely objective to the advisor or the client.”

Now, who is to say how objective the analysis is until we can crack it open ourselves? We have to take his word for it. Part of the case made, however, is that current ESG tools available to advisors are too complex and a point well made during the show is that a typical report generated from one of the three most well-known providers is more than 80 pages long. This, I have seen for myself.

And unlike the major competitors in the space, which tend to be $10,000 to $20,000 a year in licensing or subscription fees, Act plans to charge $250 per month per user.

Ultimately, it will be client and advisor demand that decide whether this ESG tool or some other becomes successful at the retail level. This remains an open question at present. A point driven home by the judges themselves when one said his firm was receiving no client inquiries about ESG investing while another said his firm was.

Act already has several partnerships according to Unwin, each, he said being a bit different. Some are co-marketing, “some are integrations with our software,” he did not name which is which but they include Black Diamond, SS&C Institutional, Riskalyze and Bloomberg. Revenue is small thus far, though, at $50,000 annually with 22 clients and a burn rate of $50,000 a month, according to Unwin.

Act is looking to raise 10% or $1 million on a $10 million valuation, mainly to be used in marketing efforts to help grow its subscription base.

Episode Three: ReAllocate

Adam Hooper, founder of the real estate investment platform ReAllocate, struck me immediately as the most practiced presenter of the three startups this season. He even sounds slick.

As he unpacks his story on the video, we find he is also founder of RealCrowd, of which ReAllocate is “the next evolution” and also a subsidiary. Upon further digging, I find that he also went through the Y Combinator program (a startup incubator) at the time he launched RealCrowd.

No wonder he seems like a pro at this.

Investing directly in real estate is difficult at best; as a way of diversifying a portfolio, it makes little sense for any but high and ultra-high-net-worth investors. Meaning that it is UHNW investors and their advisors who reap the benefits real estate can offer, including diversification, appreciation over time and, in some cases, tax benefits.

It should be noted, and this only comes up in the back and forth with the judges, that ReAllocate is only for SEC-qualified investors. We also find that while Hooper is seeking investment, ScratchWorks is also about lining up RIA partners with clients interested in the real estate sector.

With ReAllocate, Hooper and his team are taking their many years of experience in the real estate technology space and applying it to simplify the very complex risks associated with real estate investments.

Specifically, the application looks at what the startup has identified as the five main categories of risk. 

“It’s the market, the manager (so the sponsor that is actually running the investment), the physical asset itself, how the investment is capitalized and the partnership structure of that investment,” Hooper explained to the judges.

The software takes in those factors for any given potential investment and its algorithm analyzes them for the advisor to use in collaborating with a client.

“Within those five buckets of risk [using the software] you can understand at a very granular level how much risk you are taking on in that investment and from there whether or not the return you are expecting to get from that actually makes sense. So it allows us to have a more appropriate risk-adjusted return conversation, which to date in the real estate asset class just hasn’t existed,” said Hooper.

In a nutshell, what ReAllocate has attempted to do is make direct real estate investment neatly “packaged” for advisors, empowering them to have a fully digitized experience and share it with their clients—without having to add real estate experts to underwrite and source the investments.

While I have yet to make a direct comparison, ReAllocate reminds me, at least in its mission to simplify and open up real estate to a wider range of investors, of another startup I’ve written a good bit about: AcreTrader. While AcreTrader has a niche in farmland, ReAllocate’s ambitions are far broader, covering potentially any type of real estate and even other alternative investments.

The ReAllocate team has, to date, raised $4 million between a seed round and “extension rounds” over the past five years. From the ScratchWorks crew, Hooper is seeking to raise $3 million in funding or selling 15% of the company at a $20 million valuation.

Judges expressed strong interest in the platform and its mission but did have questions around whether investor clients would have to file individual K1s for each deal, to which Hooper responded “yes.” Meaning a lot of potential compliance expense.

ReAllocate charges 1% on committed capital for each deal. The company is seeking $3 million, or 15% of the company at a $20 million valuation. 

Keep an eye out for the final episode

I’m looking forward to the fourth and final episode, which will be released on Nov. 2 and reveal who receives funding and makes a deal. And yes, I am rooting for all three. No dogs here in my estimation. While I do have a favorite, I’m not telling you which one.

I would make one final note that given our nation’s tumultuous 2020, it would be inspiring to see some additional diversity among both the investors and startup founders in the year to come.

Editor/Writer's note:

In the original version of this piece I referred to Act Analytics as a "black box" solution. The firm got in touch in an effort to convince me this was not the case and I agreed to spend some time virtually with co-founder Zachary Dan. He provided me a demo showing me some of the application and its interface and did indeed convince me of how seriously he has taken his mission to do the exact opposite of creating a black box. While very few advisors would ever desire to drill down to seeing the underlying code and architecture of the application's algorithm most advisors with an interest in ESG are certainly interested in a tool with which they can actually interact and collaborate with clients on the topic in a meaningful way. And this is what Act has accomplished, and hopefully, will be able to continue building upon. The interface and its categorizations of factors within ESG are visually intuitive as are the charts used to describe the data presented. And even when not, are far easier and more straightforward for an advisor to further explain to a client in real time than anything else I've seen. 




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