Here is a sobering statistic from Tom Nally, head of advisor services at custodian TD Ameritrade Institutional: Ninety percent of advisors have more than 50 percent of their clients already in “de-cumulation” mode.
For Nally, who oversees TD Ameritrade’s offerings for over 6,000 RIAs, it underscores the urgency to capture the “money in motion” as it heads out of those entrenched accounts and to younger Gen X and millennial prospects. For advisory firms that want to capture it, digital automation will be table stakes. It’s automation that will help advisors scale up the only thing that sets them apart—an ability to have the one-on-one conversations assuring clients they are making the right decisions across all aspects of their financial lives.
Wealthmanagement.com spoke to Nally recently at the custodian’s Elite Linc conference, a gathering of 275 of the firm’s largest advisors, about the demographic challenge, its model marketplace and risk assessment tools (both tools finalists for the 2018 Wealthmanagement.com Industry Awards), and why they next plan to replicate Veo One’s open architecture structure for their advisors’ client-facing portal, letting advisors mix-and-match widgets from a host of tech vendors.
Wealthmanagment.com: Any themes that have emerged in the industry for you since the last Elite Linc conference?
Tom Nally: I think a lot of these folks are at the point where they're trying to figure out what the future holds, how can they control their firms. Technology expectations are rising within the consumer base, they want to make sure they have digital access all the time. You have demographics shifting where the boomers are now basically deeply entrenched, moving towards de-cumulation mode. Where is future growth going to come from?
At the same time, you have this massive tailwind around the RIA model where consumers are looking for a better relationship with their financial services provider. They’re more aware than ever before. They want to understand how you get paid. Are you intending to sell me one thing over another? Do you really have my best interest at heart? I think we should all be very, very enthusiastic and excited that even though the Department of Labor’s fiduciary rule didn’t come to fruition, that it happened, because it created a nice debate in the space around doing the right things for the client, maybe changing the way financial services [are] perceived by the public. That Edelman PR Index study (gauging the public’s perception of different business sectors) always just boils my blood because financial services is usually dead last and that is not something to be proud of.
I think advisors are really trying to figure out what does my firm look like in the future? I can’t just focus on the returns, I’ve got to make sure that my technology is up to snuff and meets the consumer’s demand. They’re not just comparing me to their financial services experience with another provider. They’re comparing me against their Apple experience, their Google experience, their Amazon experience, their Uber experience. And I think we’re in a great position to help them with all of this stuff.
WM: The opportunity is really capturing the demographic shift, right? Not expecting older clients to change.
TN: Ninety percent of all our advisory firms have more than 50 percent of their clients already in de-cumulation mode. What does that mean for the space?
When you look at advisors, 62-ish years old is their average. Clients tend to be even older—plus 5, plus 10. You’ve got to recognize most of the assets are actually concentrated in these older, wealthy, boomer-type families. Every day that money gets more deeply entrenched. You don't see a lot of 78-year-old couples who have been with their financial advisor for 25 years saying, “Hmm. Let’s go find someone new.” No. What’s the point? They don’t do that. So you have to assume that money’s not accessible, and you need to look at the money in motion, and the money in motion is all around next gen. Generation X too are getting to their peak ages, their earning ages, but also in a position to inherit the most amount of wealth in history really from the Greatest Generation, and then ultimately from the boomers. So it’s causing advisors to rethink their structures, their future offerings, around that shift. It’s a massive, massive, massive change.
WM: Many advisors here consider their value to be portfolio management. They say they don’t use models. Do you see that changing?
TN: Performance is not a great way to differentiate. One of my big messages when I talk to a lot of advisors is to really think about what your role is and where do you build the most value? And it’s about automating everything that you possibly can within your business, even at the commodified level of engagement. Everything should be automated. Portfolio management, CRM, rebalancing, everything.
I think people need to move away from the technical aspects of their business as a differentiator and move towards the thing that people really can’t get through technology, and that’s the empathy, the one-on-one engagement, the “am I going to be okay?” conversation. That is the least scalable component of everyone’s business.
The reality is there are some firms out there that are still portfolio managers and their value proposition is to try and generate alpha. But the number of those on a relative basis is very small. For the most part these folks are comprehensive wealth managers. They’re being pushed more into helping clients with everything to do with money.
We’ve been working with our advisor panel over the last six months to really study the adjacencies that maybe they haven’t decided to go into conscientiously, but the clients are pushing them there. They’re asking about elder care, healthcare, college planning, structuring a small business, tax law changes. You name it. If money is involved, the advisors are the place that their clients turn to. And that puts some strain on the firms to make sure that they’re able to deliver those services. We’re trying to understand what we might be able to help them deliver at scale and turn that into a differentiator versus their competitors.
Adding those services I think is one of the things that helps them from a fee-compression perspective. They haven’t seen a tremendous amount of pressure on fees, but what they’ve been doing is adding incremental value to their offering, and it just continues to get broader, and broader.
WM: You’ve added the Model Marketplace to the platform recently. What problem are you trying to solve there for advisors?
TN: We looked at iRebal, which is basically advisors creating portfolios and rebalancing those portfolios to the target asset allocations. Really sophisticated technology. Now how can we take that and add on incremental utility for the advisors? Why can’t we just add a supermarket of model portfolios for third parties, so advisors can basically outsource portfolio management and focus on what they really should be focusing on, engaging those clients on a one-to-one relationship basis.
So we started with the free models, right? And now we’re looking to the portfolio strategists and those will be paid-for models. And we think there’s an opportunity to give advisors ease of use and to take out expenses, so you don’t have that third-party overlay manager who necessarily has to engage in all the paperwork, and instead do it all through a market center, which is pretty exciting. It’s just taking what we built and then building incremental utility around it.
And with the ETF market center, we have among the largest number of funds available commission-free. For core portfolios, we have the SPDR funds. It’s a very, very great deal. They’re 17 to 33 percent cheaper than comparable platforms. Feedback has been spectacular from advisors.
WM: There was some controversy when TDAI removed Vanguard’s ETFs from the commission-free lineup.
TN: Vanguard is a great brand, and a great company, and they’ve done a great job in being an advocate for the consumer and I think they’ve pushed financial services in the right direction over the years. We have a wonderful relationship with them on a lot of fronts. But with the growth of ETFs, we couldn’t afford to just give away Vanguard for free. There was no economics at all. Given the economics of an ETF Market Center, no one’s getting rich off of that, right? It’s more how to sustain operating costs. It’s delivered for free, but at the end of the day, with all the bookkeeping and dealing with the client end, we handle all of that. And Vanguard doesn’t want to do that. We have a great relationship, it’s just a matter of making sure the economics work for everybody. We still give everybody a choice. You can still buy Vanguard ETFs.
WM: You recently introduced a risk assessment tool for advisors to analyze their practices. (The initiative is one of four from TDAI’s selected for the 2018 Wealthmanagement.com Industry Awards.) How does this help advisors?
TN: It’s how we can help advisors really figure out what their strengths and weaknesses are and utilize data analytics to understand where they can potentially get better. We’ve got so much information about how advisors’ businesses are functioning, what they’re doing well, what they’re not doing well, just on the operational data we have. And then you add on the information that we have from FA Insights (TDAI’s survey of financial advisory practices) and it gives you great benchmarking capabilities to see, how can I do a better job and mitigate risk within my organization? How can I do a better job of making sure I’m performing at a high level?
WM: What else on the technology front?
TN: We’ve contracted with the company that created Siri, called Nuance, and we’re working with them to create a digital virtual agent, first for our internal associates, and then we’re going to put that digital virtual agent out for all of our advisors as well. So it’s machine learning, AI-driven. When you ask it a question, it gets smarter every time. The more it gets used, the smarter it gets. Our advisors deal with a ton of complex situations for their clients. There are a lot of variables involved. “How do I (fill in the blank).” We want to make sure that we have the right level of sophistication in the tool that we’re working with to be able to answer those questions through AI. And we’re actually seeing that come to fruition.
What’s cool too is our retail partners have (initiatives around) a Facebook Messenger bot, a Twitter bot, Apple Business Chat, and then through Amazon, Alexa. How do we distribute those same tools to end clients and advisors? We’re trying to go where the end client already is, so we can take the heat off of the advisor when the client just has a question. There is no reason the end client has to call the advisor to get information around basic information about their account.
When TD Ameritrade launched on Facebook Messenger, within a matter of weeks we had 25,000 unique end-client engagements a day. Let’s take that same technology and allow advisors to have that distribution mechanism as well.
The other is around AdvisorClient.com (TDAI’s account portal for advisors’ clients to check on their portfolios and account balances). We’ve spent a lot of time with focus groups, both end clients and advisors, on what they’d like to see, and we’ve been working for the last year on coming out with a new version of that. It’s going to have a much different, simpler look and feel, but the thing we’re really excited about, it’s going to have a third-party open architecture infrastructure similar to that of Veo One.
So as far as the Orions or Black Diamonds of the world go, an advisor can put that portfolio and reporting on there for the end client, maybe add weekly market commentary, whatever they want to do. It’ll have a digital vault if you want to pass documents back and forth. And you’ll have the ability to do a video conference directly with the end client and the advisor. You’ll have that open architecture framework, so we can plug widgets in and really make it simple in a nice, little place for that end-client digital engagement. You can pull in (a client’s) actual financial plan and performance reporting. We’re making a big push to roll this out in a beta trial this summer. We’re super excited about it.