Amazon's multibillion acquisition of Whole Foods has launched a wave of speculation about what other industries could potentially become a target for its founder Jeff Bezos.
Within wealth management, there's been an ongoing discussion about what would happen if a tech giant like Google decided to foray into financial advice. Riskalyze CEO Aaron Klein says there are a number of hurdles that make that possibility unlikely in the foreseeable future.
But the head of the Sacramento, California-based portfolio management software firm — which has now
Adviseos and their ability to build relationships and trust with clients is a key buffer around their businesses, Klein says. But there is much in planning that can be automated and that is appealing to tech firms examining the wealth management industry, he acknowledges.
An edited transcript follows.
Is the future of advisor tech market going to come down to, the most simple, wins?
We have often allowed complexity to be the enemy of progress for our clients. The advisors we serve are all very focused on what makes their client successful and when we hear demands for complexity from those advisors, we try to turn that back and say, 'Can’t we help you help your client achieve the end result you're looking for in a much simpler way?' And we hear a pretty strong response back that, yes, that’s the right answer.
Complicating things for no reason, it may look cool; maybe you try to use it to differentiate yourself on the technology side, maybe you try to do it to differentiate yourself on the advisory side. The reality is people choose advisors because they feel comfortable with them, they trust them and the advisor is telling them information that they really can’t hear somewhere else. We just continually find that if you can make life simpler for the advisor, it really allows the advisor to showcase what’s great about them. The unique benefits that their firm provides to the client, the behavioral coaching and what I like to call it being the financial consigliore that advisors love to be for their clients. We want to take time and focus away from the complexity of technology and let that stay for the background and let the advisor really shine.
Speaking of technology: Jeff Bezos calls, he says, 'I've got this idea about wealth management, Aaron, what do you think?'
(Laughs) There is always so much talk in our industry about, 'Oh, what happens if Google gets into finance, what happens if Facebook gets into finance?' I think it’s an interesting hypothetical discussion. I think that it’s always possible, but I would go back to the DNA question. I love that you picked Jeff Bezos, because Amazon is the closest to maybe having the DNA to do something in the wealth management space. I don’t see that with Google, I don’t see that with Facebook. They’re great at building services to organize information and do social. But I don’t know anybody that wants to be social about their money. I’ve never seen the benefit of Snapchatting my investments.
So when that kind of call happens, the question you’re asking is, Amazon could be an interesting customer for this technology, but it’s going to be a very different world for Amazon. What’s not in their DNA is working inside a regulated industry like this. The regulatory framework that advisors understand and work within is a big piece of the puzzle, but great businesses are built from having a great product to offer and having distribution to get there. Amazon has a very interesting level of distribution, they have relationships with customers. Any time you talk about a player that actually has distribution, that’s interesting.
Now they'll have physical locations.
Would you go meet with your adviseo inside of a Whole Foods? I’m not sure. Again, I think it’s interesting to bring up Jeff Bezos because if there is one technology company you could envision actually having the credibility to maybe try to have an offering like that, I don’t look at Google and Facebook and say I would trust them with my money because who would you call if something got screwed up?
Amazon gets a little closer, but I still think the ace up the sleeve of every human advisor is when you get to a certain point in your financial life, number one, you really want somebody to tell you how to navigate your finances. Finances are complicated, not something you want to leave to chance, and not something you want to figure out yourself. And you really don’t want it getting screwed up.
So as a result, this is really a trust question, just as how a client chooses an advisor. Could Amazon build that kind of trust? Is it interesting to them to build that kind of trust, to be in that business? One would argue that they’ve got a lot of other territory they could conquer in financial services before they get to investing. Like, why isn’t Amazon my bank? So once Amazon has a working business in personal finance and banks, then maybe we start worrying about what they’re going to do in investing, in wealth management.
You noticed that Facebook has now started its own payments service, though, and they’re touting it as an alternative to PayPal.
It’s sending money from one person to another. That's an interesting start. If they morph that into making it compelling for me to actually store money with them, that’s another interesting step. But those are sort of the steps that you have to take before you can get to a place where you start thinking about whether or not that makes sense.
I look at all the different startups that are thinking about that, and to some extent I think they may simply turn out to be lead generation engines for real advisors. Do I want more of my money to go to our charity in Ethiopia or do I want more of my money to go to taxes, and how do I structure that to make sure that that happens that way? That’s the kind of question that I’m not going to get a good answer to on Facebook Messenger. To really delve into that I’m going to need to sit down with a real advisor and that’s going to be worth the fee that I’m going to pay to that advisor.
The industry thinks that the hybrid model can solve for that.
My argument is technology like Autopilot is going to make it profitable for that advisor to be able to spend their time doing the human things that they’re valuable at. Right now we’re eating up too much of that time hitting the trade button 600 times a day. That’s the piece that Amazon looks at and says, 'Oh, this is going to be easy to be in wealth management, we can automate that.' Agreed, Amazon could automate that piece. We’re building that automation for advisors so that they can turn around and actually do the value added parts of being an advisor at scale. I think that’s how we empower human advisors to win.
Do you see at some point the cost of doing business becoming cheap enough for outside firms to consider jumping into wealth management, despite the regulatory hurdles?
Potentially, but I will say that, if you are going to overcome the regulatory hurdles, again, I would look to when they actually become banks. It is wildly more profitable to be a bank than to do wealth management inside of that bank. A bank will probably earn about 200 basis points on the money that you deposit with them and they’ll earn about 30 basis points on the money that you invest with them. For many banks, the only reason they do investing is because they've already got the customer, the distribution is already built in.
So I would completely agree, the first step is the ability to send payments. The next step is to make it compelling for you to basically use me as your bank. Square is in the middle of doing that. We've gone from an adapter where I can take credit cards on my phone to Square Cash where I can send money between phones electronically, to now I can get a credit card attached to my Square Cash account. I can keep my money in Square Cash. They’re not paying me any interest on it yet, but give them time, that will become a bank. Once it’s a bank and you’ve got money there, well then they would probably follow the same pattern, they want to provide that incremental service that drives another 30 basis points of revenue.
Lenders have done that. SoFi is now offering wealth advice and applied for a bank charter.
SoFi has figured out they can scale the business using lending and then take those customers and move them into investing, somewhat similar to what the banks are doing. SoFi may have found a good channel. What we have learned over the last five years is that it’s incredibly difficult to have your starting point be investing. That's a bit of a moat that human advisors can be happy about that’s around their business. The reason that they acquire clients is they go out into the community and build trust and get referrals, and that’s something that an online brand finds very, very difficult to do.
