Wealth Management

Wealth Management: Old vs New

Meeting Gerard Michael, Founder of SmartLeaf last year at its offices in Cambridge, Mass. was rewarding since his company shares a few things in common with Six Trees Capital LLC (the company behind MAX, the advisor-centric cash management platform).  I’m glad to have Jerry as a guest writer for The FinTech Blog.

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It’s not news that wealth management is changing. And the change goes deep, affecting everything from the role of the advisor to the mechanics of rebalancing. Even the core value proposition is changing.

So what, exactly, does the “new” wealth management look like? There’s a lot going on. We thought we’d try our hand at describing the changes and the forces driving them.

Value proposition

Let’s start with the core value proposition of wealth management. Historically, the main focus has been on the search for performance. The advisor’s value proposition was that they were experts on stocks and bonds — and, at least implicitly, that the client would benefit from the advisor’s security selection acumen and access to alternative investments.

This is changing. Firms are moving away from value propositions centered on the uncertain task of beating a benchmark and towards value propositions centered on services that the firm knows it can deliver, such as financial planning, coordinating financial service providers, education, etc.

The old:
Value propositions centered on the performance value of the advisor’s security selection and active asset allocation.

Why it’s old:
Most advisors and firms are not able to deliver performance superior to index investing, and virtually none can do so consistently. Moreover, involving clients in trade decision making is inefficient. Worse, it’s counterproductive: it focuses clients on performance, which they can’t really control, and away from planning, which they can.

The new:
Value propositions centered on providing holistic guidance that helps clients meet their financial needs. This includes:

  • Delivering a customized, tax-optimized solution using low-cost products.
  • Acting as the client’s “general contractor”, coordinating efforts of the client’s accountants, trust & estate lawyers and insurance brokers.
  • Providing financial planning.
  • Acting as a “coach” and counselor, guiding clients to make wise financial decisions.

Security selection and tactical asset allocation

With old wealth management, the advisor picked stocks from a buy list created by the firm and guided tactical asset allocation, within bounds set by the firm. This is sometimes called “Advisor (or rep) as PM.”

The preferred current approach is to replace buy lists with models selected by an internal investment policy committee (IPC) or a third-party firm.

The old:
“Rep (or advisor) as PM” — client-facing advisors selecting securities from firm-created buy lists, subject to firm-created asset allocation guidelines.

Why it’s old:
Constructing portfolios from buy lists is manual, expensive and error-prone. There’s little evidence that advisors add value through selecting securities or active asset allocation. More importantly, advisors have better ways to spend their time. Others can select securities. Advisors alone can best understand and guide their clients.

The new:
Delegation of security selection and basic asset allocation to third parties or internal IPCs who deliver their best thinking in the form of model portfolios.

Rebalancing, customization & tax management

Traditionally, advisors rebalanced their own accounts, and one of the main rationales for this was that it facilitated customization. It was believed that there was no other way to deliver customization other than to have advisors make per-account manual adjustments to trades.

There’s a better way: centralize rebalancing, parameterize customization and then automate its implementation.
The old:
Rep (or advisor) as PM — client-facing advisors trading all accounts. Customization and tax management are inconsistently applied “extras” that are implemented manually as “on the fly” adjustments to trades.

Why it’s old:
Manual customization and tax management by client-facing advisors is inefficient, expensive and error-prone, and this results in customization and tax management being kept to a minimum. When customization preferences are captured as settings (e.g. “never buy tobacco”), their implementation can be automated and efficiently handled by dedicated specialists, which enables firms to make high levels of customization and tax management standard offerings. And, as with security selection, advisors have better ways to spend their time than manually rebalancing accounts.

The new:
Parameterized customization, with implementation delegated to specialists within the firm or to a third party, who oversee a largely automated process. This:

  • Reduces costs
  • Increases consistency and compliance
  • Increases the level of customization and tax management that can be economically provided

 

The new wealth management is better than the old. It’s better for clients, who benefit from greater customization, superior tax management and more time with their advisors. And it’s better for most advisors, many of whom have struggled uncomfortably with the traditional industry norm of having to project that they add value through superior performance. It is replaced by a steadier, more certain value proposition based on guiding clients to meet their financial needs.

About the Author:

Mr. Michael co-founded Smartleaf in 1999 to reduce the operational burden of managing customized, tax, risk, and expense sensitive personal portfolios. Smartleaf began selling its overlay portfolio management solution to banks, trusts, and financial services companies in 2003, and the company has become a leader in this space with over 50 clients and over $50 billion in assets under management.

 

Max: Multi-Bank Cash

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In addition to publishing The FinTech Blog, I lead Partnerships and Business Development at MaxMyInterest, an award-winning FinTech firm that provides a way for high net-worth individuals and their advisors to earn dramatically more on cash.

We offer a service called MAX that combines a multi-bank solution with higher yield than brick-and-mortar banks, brokerage accounts or money market funds – with broader FDIC insurance protection, and features to optimize your cash.

max-logo-registeredI’ve seen first-hand the huge role that cash plays in the multi-trillion dollar wealth management business from working in online banking and wealth management. Max is smart for clients with substantial cash – and a great product for financial advisors, who have lacked any form of compelling solution for clients seeking a better return on cash.

After the one-time setup, Max continuously monitors interest rates to make sure you’re always earning a competitive yield. It operates much like how family offices manage cash for ultra high net worth families, but is available to a broader demographic.

Max helps you manage a portfolio of online bank accounts, linked to your own existing checking/brokerage account so you don’t need to visit multiple websites to both see and manage a combined balance across multiple banks.

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With Max, funds are “waterfalled” across your accounts, so cash is always earning the highest rates.

Since Max is not a bank – and never takes custody of your funds – your money is always kept safe in your own bank accounts, held in your own name, to which you have direct access at all times.

As part of the service, Max includes a “rate following” feature, whereby if a bank were to either raise or lower its rates, your funds automatically move to the higher payer bank, while keeping you under the FDIC insurance limit.

Another benefit is the automatic cash sweep. To help prevent inadvertent build up of cash in accounts paying very little interest, Max includes an automatic cash sweep that sends cash above a target account balance to higher-interest accounts (and topping up your checking account, if your account falls below a threshold you set).

Some banks and brokerage firms offer a sweep, but sweep from one account to another at the same financial institution, and often to money market funds that don’t pay much.

Higher Yields with Lower Risk

How is Max able to deliver yield that is 10x greater than most bank accounts, and 50-100x greater than most brokerage accounts? By leveraging the costs savings associated with online banking. Yet the risk is actually lower, since the funds are FDIC insured and often spread across multiple banks vs. concentrated at a single institution.

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The yield benefit is substantial, and Max provides reporting tools to see how well you’re doing including what you’re earning versus what you might have earned at your bank.

Max also has Consolidated Tax Reporting, so you don’t need to worry about looking for your 1099-INT statements, despite having multiple banks.

Max includes time-saving features such as Intelligent Fund Transfers, so you can specify an amount to move out of your Max account, without having to know which bank:  Max is smart. It draws from your lowest earning bank account first, and does the reverse as any  funds are deposited, filling up to the FDIC limit.

Do you need a multi-bank account?

For those with little cash, Max offers features that may not make sense for its fees. Max is a smart answer for advisors to give to their clients with substantial cash. Some advisors, especially those who are not fiduciaries (or don’t focus on client’s best interest) may be tempted to leave clients in money market funds or not ask about held away cash.

Whether held away or in the brokerage account, the research shows that HNWI’s in the U.S. prefer to hold cash at significant levels, since cash drag is less of a concern given their overall financial picture, or a preference for cash as ‘dry powder’, hedging or for other reasons, such as capital calls.

Percent Cash and Yield Advantage

Max members are typically business owners, doctors or dentists, technologists, lawyers, startup founders or early employees, investment bankers, engineers and others with significant cash. While Max is open to everyone and there is no minimum balance requirement, Max members tend to hold between $50,000 and $5,000,000 in cash.

The individual FDIC insurance limit is $250,000, so Max helps people obtain broader FDIC insurance coverage by opening accounts at multiple banks and spreading funds across these accounts. Max also supports individual, joint as well as revocable trust accounts.

Max is “set it and forget it” service that makes money for you while you sleep.

Helping Advisors in a Low Yield World

One reason I joined Max was its focus on financial advisors. Many FinTech startups focus on competing for eyeballs in highly fragmented markets by giving away B2C services for free and then finding other ways to ‘monetize’ their customers, or chase business in the crowded marketplace lending or alternative lending category.

In wealth management, it’s not always about cost, and investors value their privacy and don’t want to be ‘monetized.’ I also think advisors play a key and growing role for clients with substantial investments.

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Since Max is capable of delivering an extra 0.90% of yield on cash, that’s equivalent to helping investors earn an extra 0.21% across their entire portfolios.

We’re glad to bring Max to forward-thinking advisors looking for creative solutions for their clients. Many clients are looking for smarter ways to get a better yield on their cash, and Max is a compelling solution that can boost a client’s returns on all their holdings – inclusive of cash – while enabling an advisor to provide more holistic advice.

The Future

Max is now compatible with accounts at 15 of the nation’s largest banks and brokerage firms, integrates with advisor CRM systems and, soon, portfolio accounting systems.

In the future, investors will insist on making the most of their cash in the bank. According to the RBC/Capgemini World Wealth Report, high net worth households currently keep 23.7% of their holdings in cash.

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Advisors who already use Max to help their clients earn higher yield are doing their clients a great service. It won’t be long before all advisors realize that cash, the most-often-overlooked asset class, is worthy of greater attention.

 

Max is a new and exiting player plus an emerging aspirational brand within the upper end of financial services landscape, and offers a glimpse of future of financial services as a multi-bank world.

While only growing by word-of-mouth and referrals from advisors, individuals can sign up for Max by speaking to their advisor or via Max website at MaxMyInterest.com.