Regulators haven't been shy about letting firms know they expect compliance with new marketing rules and bans on using services like WhatsApp to conduct unrecorded chats with colleagues and investors.
For consultants whose job it is to help advisors and other financial professionals
Yext, a large online branding and marketing firm, has chosen the latter path. New York-based Yext announced on Monday that it is buying the
Mike Walrath, the CEO of Yext, said the firms his company works with are generally looking to simplify their relationships with outside consultants and other third parties. Rather than go to individual vendors that each offer a specific service, many prefer to deal with a single provider.
It's that desire, Walrath said, that Yext is trying to meet with its planned purchase of Hearsay.
"There are a lot of companies that have pieced together a platform for social and a platform for compliance and a platform for texting, and then a platform for listings and a platform for reviews," Walrath said. "In this case, we're already multiproduct vendors on both sides of this transaction. So having one relationship, one team, one service organization, one set of analytics, one data infrastructure, all of those things are part of the trend that we're seeing from customers."
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Compliments for the complements
Michael Boese, the CEO of Hearsay, sees many of the same advantages as Walrath.
"If I've got to summarize it, it was complementary products, complementary customer bases, and then there was this notion of both of us really accelerating our visions and our product strategies," he said.
Walrath said there is almost no overlap between the services offered by Yext and Hearsay. Yext specializes in helping advisors and other clients improve their online presence — strengthening search-engine optimization, drawing up effective social media posts and managing their reputations through public reviews and testimonials, among other things.
Hearsay, by contrast, has developed software systems mainly designed to record electronic communications and scan them for messages and other content that might raise regulatory red flags. Walrath said clients are particularly anxious these days to make sure whatever they and their employees are doing online or in text messages and encrypted chats doesn't run afoul of industry regulations.
$3 billion in fines and counting
The Securities and Exchange Commission and other watchdogs have driven home just how serious they take compliance in a recent series of steep fines imposed on some of the biggest names in the business. By now, virtually every well-known Wall Street and regional firm has been hit with fines for
Meanwhile, the SEC has been using its enforcement division to remind firms of their duties under its
Amid all of this, Walrath said, Yext's clients have been expressing more anxieties about compliance. The question then became: Should he and his colleagues try to devise their own systems to offer what a company like Hearsay was already doing?
"It's always been a thing that I think the companies were either going to wind up attempting to build each other's products or getting together at some point," Walrath said. "And so we've been able to get together, which is nice."
Terms of the deal
Yext's deal to buy Hearsay, which is awaiting regulatory approval and is expected to close before the end of the year, offers $125 million upfront and another $95 million contingent on certain performance targets being reached. Those benchmarks, Walrath said, primarily have to do with revenue goals for Hearsay.
Boese agreed that the increased frequency of enforcement actions and steady adoption of new industry regulations should mean there will be no shortage of need for his firm's services.
"I definitely have seen regulatory pressures and SEC filings in the messaging cases, as an example, driving demand," Boese said.
Both Walrath and Boese said it's too early to say if the Hearsay name will remain in place following the proposed merger. The same goes for the branding of specific products like Hearsay's Relate, which is used to track and record text messages.
The good news, Walrath said, is that Yext's and Hearsay's businesses are different enough that it's unlikely there will be many redundancies in employee positions.
"We value their team members, their R&D, their sales and marketing and their company structure," he said. "There's always a question during any acquisition about whether everybody wants to stay. But this is very much a 'one plus one equals three' deal in our minds."
Boese confirmed he would be making the transition as well. Most important, he and Walrath said, is that customers will notice few if any disruptions.
"They are going to have the same account teams, and they're going to get the same great service," Boese said. "And now we're going to be able to offer that to our customers on a much broader, deeper platform."
Likely customers
Hearsay Systems is a private company founded in 2009. Its list of biggest customers includes such industry stalwarts as BlackRock, Charles Schwab, UBS and Janney Montgomery Scott.
Yext meanwhile was founded in 2006 and joined the New York Stock Exchange by holding an
Joel Bruckenstein, the president of Technology Tools for Today, or T3, said the firms' prospective combined offerings seem mostly meant for large firms and may make little difference for the smaller registered investment advisors he mainly works with. Besides wealth managers, Yext and Hearsay seem interested in working with the insurance and banking industries.
"So maybe there will be more opportunities to cross-sell and offer more services," Bruckenstein said. "But I don't think in the independent RIA space that it's really meaningful to them one or the other."
How AI fits in
Walrath said he thinks consolidation will continue in the online marketing and branding industry, although there will always be room for new entrants. One of the big differentiators for firms looking to stand out, he said, will be the uses they find for artificial intelligence, machine learning and similar technologies.
Yext is already working with large language models — OpenAI's ChatGPT being the most famous example of these systems — to mine clients' social media posts for insights into what sorts of messages and content elicit the most desirable responses. AI, Walrath said, can not only provide clues to what subjects garner the most attention but also how discussions of those subjects can be modified to better connect with particular audiences.
Some of the resulting content will be generated automatically and tweaked later to make it more individualized, Walrath said. Hearsay's contribution will be to keep the messages from infringing on any regulatory taboos. And Yext's vast trove of data will help to ensure the AI systems are drawing on verifiable facts and accurate information, which should prevent "hallucinations" — seemingly factual statements that in fact have no grounding in reality.
"So the beauty of this is that you will have a huge library of brands' compliance-approved messaging, and you start mixing that up with generative AI," Walrath said. "And then you starting thinking about, 'What do I want to talk about? Do I want to talk about a Roth IRA? Do you want to talk about fixed income? Do I want to talk about interest rates?' And then you can actually generate non-hallucinatory posts and content from an approved compliance perspective."
