Participants:
Steve Wershing
Julie Littlechild
Evan Rapoport
Steve Wershing: Custodians, asset management platforms, and technology each have influence over your client experience, and the combination has the potential for even more significant impact. On this episode, we invited Evan Rappaport to discuss all that with us. Rappaport is the founder and CEO of SMArtX Advisory Solutions, a managed account technology platform. We discuss outsourcing partners and how they overlap, including an innovation he’s pioneering, the outsourced chief investment officer. We talk about separately managed accounts versus unified managed accounts, and even some pitfalls of overly relying on technology, analyzing the recent outage of the totally virtual direct to retail platform Robin Hood, as an example. So, here now is our conversation with Evan Rappaport. Evan Rappaport, welcome to the Becoming Referable podcast, thanks for joining us. Evan Rapoport: Steve Wershing: Evan Rapoport: So, when I think about what we offer at SMArtX, we provide outsourced back office, middle office, trading support. So, gosh, if you don’t have your traders available to be able to make those trades, or if you had one trader and that trader is sick, and now you’ve got the responsibility of trading, and you’re not used to trading, you can imagine how detrimental that could be to your business. As it relates to outsourcing, specific to what we do, I think it’s more important now than it ever has been. Julie Littlechild: Evan Rapoport: Steve Wershing: Julie Littlechild: Steve Wershing: Julie Littlechild: Evan Rapoport: Julie Littlechild: Evan Rapoport: One, separately managed accounts within the unified managed account structure, in my opinion, are simply better investment vehicles, versus what a lot of the advisors have been using in the past. Products like mutual funds, for example, versus the separately managed account. The issue with separately managed accounts, of course, is that they were clunky and hard to access, so you had to open up a separate account for each individual strategy, and then you had to manage those, again, siloed off from the others. Versus the unified managed account structure, where now, using a platform like SMArtX, you can choose from 100s, if not 1000s of strategies, you can organize them in a single account structure, they stay sleeved from each other. But, at the same time, you have the benefits of being able to rebalance, for example, within the portfolio. So when you have SMAs scattered, you can’t move money easily between them, versus when you have a unified managed account, and you keep the balance at 25% each, with a 20% drift, let’s say, again, the systems able to rebalance those, and keep those in line. That’s one of the big benefits, of course, to the UMA structure, versus the traditional SMA structure that was used in the past. We can speak for hours on the benefits of SMAs versus mutual funds, the tax efficiency, the liquidity. I mean, I can’t believe we had some mutual funds gate some of our clients this past quarter, they couldn’t get out. That is one of the scariest problems that I see with these products, it’s what we saw with hedge funds in ’08. The gate, you can’t get out, market drops, you’re stuck. With an SMA, you don’t have those problems. Last couple of points on that, benefits of the SMA include the ability to do tax loss harvesting in addition, which can’t do at the mutual fund level. They allow for exclusions, so there are a number of screens. There are a number of benefits, obviously, versus the traditional products that they were using. Anyway, I probably went on too long there. Steve Wershing: Evan Rapoport: The unified managed account, of course, allows you to house multiple, separate accounts within the same, single account structure. Steve Wershing: You’re saying a UMA, everybody’s in the same place, everybody, they can keep doing their own thing, but it’s all under one account number, all on the same container. Evan Rapoport: Steve Wershing: Tell us a little bit about what is SMArtX Advisory, and what do you all bring to the table with that history? Evan Rapoport: First is at the enterprise level. We produce unified managed accounts technology, the actual software, so we’re not just an overlay manager, some firms license software and then provide a solution on top of other people’s software. For us, we actually built the software. So when we entered the space, we looked at the legacy architecture, and we were not comfortable with it. So we literally ripped it down to the studs, rebuilt the unified managed accounts technology in the way that we think, or we felt, that advisors would want to be able to utilize it in today’s world. That would include a system that is entirely API driven, from the core. Literally every single piece of data that comes out of our system is driven by an API. What that means is our system is flexible, it’s modular, it’s extensible, it’s customizable. So we have firms that have taken our engine, and have built an entirely new platform on top of it. You wouldn’t even know that we’re inside, and they’ve added planning, and risk and such. That’s one big benefit, is that we do power other fintechs, custodians, and larger groups. Including, for example, SS&C Advent, which of course, we built their TAMP solution in SMArtX, that is attached to Black Diamond. That’s one division, is our enterprise division, and we’re continuing to see tremendous interest there. Steve Wershing: Evan Rapoport: Let me give you some real life examples. Let’s say you have an existing website, and within that website you’re offering a couple of pieces of information, maybe some reporting, but you wanted to be able to actually offer the trading portion of the UMA. Well, you can take our APIs, and you could code up to them, and you could provide that information in your own website, versus having to send those people to another website, to go in and use that functionality, if that makes sense. It gives you the opportunity, the tool set, to be able to build on top of, as opposed to having to send someone to a third party system, to then operate within that system. Does that make sense? Steve Wershing: Julie Littlechild: Evan Rapoport: The other side would be the direct to advisor, direct to broker-dealer side of our business. So, that’s the SMArtX TAMP, that’s where we provide the full service offering to advisors, which would include the ability to come on, choose from the 100s of third party asset managers, select the SMAs. We would do their trading, their billing, et cetera, and really provide that full TAMP servicing. Akin to an Envestnet, or an Adhesion, or some of the other solutions that are out there, only we do things just a little bit different, and we feel in a little bit more contemporary fashion. Julie Littlechild: Evan Rapoport: What I am seeing, though, going back to my earlier comment, is some of our advisors who were doing this on their own, they had come to the system, they utilized the tools that we had to build their own portfolios, and they recognize that those portfolios didn’t perform exactly the way that they had hoped. That really, if you don’t have the experience and understanding how to handle portfolio construction, you’re not an analyst you’re a planner, it makes sense to outsource some of those responsibilities to folks that do have that skillset, like the OCIO services that we offer at the firm. We don’t charge for those, by the way. We want to help our advisors to be better advisors, provide better portfolios, or portfolios that are more in line with their client expectations. That’s why we don’t change for that service, whereas most do. We’re finding them leaning more on the OCIO team today, than ever before. Julie Littlechild: Evan Rapoport: Julie Littlechild: Evan Rapoport: But, I think it’s reassurance to the end consumer, the client, to know that you’ve got these very substantial organizations, that are very focused, managing your capital. Versus an advisor, whose out there, picking some individual securities or some equities. I’m not discounting self-management at the advisory level, but I do believe that there are huge benefits to hiring people that are more focused, maybe a little bit more experienced, or skilled, at managing money in that specific area. Last point on that, managing money in the sense where you’re picking individual securities, and stocks, or mutual funds, it’s not a revenue producing activity. So, what we’ve found is that the advisors who are able to outsource not only provide better returns, better results to their clients, but it also allows them to focus on areas that are maybe more important to the advisor, or at least allows them time to be able to focus more on planning, and relationship management, and working on referrals, and all the other things that an advisor does. If you’re spending your day looking at a screen, you’re not able to focus on all those other areas of being an advisor, that are so important. Steve Wershing: Evan Rapoport: Now, there’s one other big benefit to what we’re talking about, and that is its hard to fire yourself. If you made the wrong selections, you put together a portfolio that didn’t perform in the way that it should have, it’s hard to find yourself. If you had managers that didn’t perform in the way that they should have, well, it’s easy to swap them out, and to move in others. So, I think that’s a big benefit, also, for the advisor, to understand that there is this, not everybody’s right 100% of the time, and if the strategy didn’t work out properly, you can make an adjustment. Whereas, that’s hard to do when it’s yourself, right? Julie Littlechild: Evan Rapoport: If you do that alongside of the OCIO team, well then, even better. It’s not that the CIO team is saying, “Here’s what you must do,” at any point. They’re making suggestions, and of course, getting the advisor’s feedback. Sometimes, I’ll give you a specific example, we had the CIO team … We’ll talk about the different ways that they work with clients. But, they built out a number of portfolios for the advisory team, one specific group. As a result of the market, and what they felt the market will do over the next two to three months, they wanted to make some adjustments. So, they talked to the OCIO team, expressed their views, and then the CIO team was able to figure out the best way to express those views, using the different products that we have available. I think that’s why that interaction is so important, and some of the ways that, again, you can utilize the platform. Julie Littlechild: Evan Rapoport: The first is the OCIO team actually built out the investment process for them. We may start from scratch and say, “Okay, we’re going to build out, for your firm, specific portfolios to address aggressive, conservative, balanced, et cetera.” They will build out risk based portfolios, and provide those for the advisor so it makes it really easy for them to manage their business. Example, we may even put risk scores on them, of some sort, so they may have a 25, a 50, a 75, an 85. So, all they have to do to manage their business, once they’re able to score that client, is come in, select the proper portfolio, click return, and the system will automatically be traded, and managed for them, so that makes it really, really easy. That’s one way to build out the portfolios for the firm, or at the firm level, and some of the options. The second way would be to actually work with them on a client by client basis, so large case work. That’s what I alluded to before, where the advisor’s trying to win a $5 million account, and they’re able to get the portfolio that the client has currently, we’re able to analyze that portfolio, we’re able to provide the new portfolio, and show the benefits of the new portfolio versus the old portfolio, statistically and otherwise. Sometimes these presentations are 20, 25 pages, and we help that advisor to go out there, and bring on that new client. Then, the third way is customized. So, I mentioned before we can build out those portfolios for the firm, and that’s the customized solution. But, we do provide those generally, so as a client of SMArtX, the CIO team has already built out, call it 50, or 60 pre-packaged unified managed account, total portfolio solutions, we call them. We have to be careful using the word TPS, from Office Space, the movie, if we say TPS reports. Steve Wershing: Evan Rapoport: That’s the three flavors, the existing solutions that are out there, the customized versions of those solution, and then the large case work. Steve Wershing: Tell us about … Many of our listeners may not have heard of SMArtX, you’re not a platform on the scale of a Fidelity, or a Schwab, or something like that, so tell us a little bit about how an advisor can overcome their concerns about that kind of a thing. And, how are platforms like yours different than something like a Robin Hood? Evan Rapoport: So two things, to be clear. One, we are not necessarily a trading platform. While we provide trading functionality, there’s always a trading desk than handles every single transaction that goes through SMArtX. Nothing is algorithmically sent into the market, or just dumped into the market, at any time, we’re a full service organization. But, more importantly, we’re an overlay manager. So, we have access to the accounts at Schwab, Ameritrade, Persian Fidelity, et cetera, but our clients can always access their account directly at the custodian. They can make trades at any time, even if we’re a discretionary trader on that account. I think that solves the issue that Robin Hood in that, while you have us, you can always go direct to the custodian, so you always have that backup. Steve Wershing: Evan Rapoport: First, coming onto the system and either letting us analyze your existing portfolios, and helping you to build out a more scalable solution that maybe is a little bit more specific to your client’s needs, we’d love to help there. But, I go back to being able to access some of the best product in the marketplace at, candidly, some of the most reasonable rates. This is not SMArtX specific, I’m just saying SMAs generally, although we do offer some pretty good rates at SMArtX, I think is really advantageous for the advisor. To be able to produce results … and let me be more specific. So SMArtX is the only SMA UMA platform to support- Steve Wershing: Evan Rapoport: What happens is, you go to your custodian, you … Well first, of course, you want to choose the right investment platform, but provided that investment platform is integrated with your custodian, you’re going to go ahead and set up the connection between the two. You’re going to come onto the platform, you’re going to be able to see the different strategies, analyze them, put them together, run some back tests, see what the combined portfolios look like. And then, literally click a button, and implement. I mean, it’s a very, very simple process, but it just takes getting started, and getting on the platforms. We’re happy to give out some demo access to folks that are interested, if they want to come on and play with the system, and see how easy it is to utilize. But, it’s a pretty easy endeavor, once you’ve made the decision to go ahead and utilize those products versus the traditional products that are out there in the marketplace. Steve Wershing: Evan Rapoport: Steve Wershing: Julie Littlechild: Evan Rapoport: Julie Littlechild:
Welcome to Becoming Referable, the podcast that shows you how to become the kind of advisor people can’t stop talking about. I’m Steve Wershing.
Thanks for having me.
So we want to ask you about SMArtX, and the innovations that you bring to the industry. But, let’s start with something else that you are at the forefront of, and that’s outsourcing. There are lots of different things that people can outsource to a tech platform, or to services like yours. Generally, what kinds of opportunities do you see in outsourcing, and what kinds of outsourcing do you think advisors may not be thinking of these days?
Well, sure. Outsourcing is probably more important now than it’s ever been, as we’re all sitting at home, looking at our laptops or our desktops, and not having the support system that we typically had around us.
Are you seeing this, Evan, as a generalized trend over the last number of years, that advisors are really starting to move increasingly in this direction? I mean, irrespective of where we’re sitting right now, in the current crisis.
That’s a great question, Julie. Absolutely, we’ve seen the usage of TAMP specifically, UMA platforms, grow by … It was 24% annually, I think this last year, Cerule reported 20%, 19 to 20 percent growth in usage of TAMP platforms. It is actually one of the fastest growing areas within investment advisor services today, and it has been for the last five years, call it, maybe more.
Okay.
Go ahead. Go ahead, Steve.
Go ahead, Julie.
No. I was just going to pick up on outsourcing chief investment officers, in particular. I know this is just drawing on your area of expertise. So you’re seeing it as a generalized trend, but what were some of the opportunities, what were some of the problems that you were really trying to solve in your business?
So there were lots of problems that we were trying to solve for, when we created SMArtX. But Julie, I don’t know if that’s specifically what you’re asking, or what you want me to respond to. Is there a specific issue that you were looking for?
No. I was just thinking as businesses grow and evolve, we all examine some of the problems and concerns that we believe advisors are having, and just wondered how you thought about the evolution of your business, and what it is you were trying to solve for.
Sure. Yeah, I think when you zoom out a bit, a couple things.
That’s okay. Just to back out for a little bit, if there are folks that are not oriented to these kinds of things yet, if you could very briefly define what is an SMA, and then what is a UMA?
Sure. A separately managed account is a single account that is invested in a strategy, managed by a third party. So for example, let’s say XYZ Firm has a long value strategy. As opposed to investing in a mutual fund, you can provide, or give the account over to a third party manager, and as opposed to them buying a structured product, they will buy the individual securities into the account versus the pool. That’s the SMA, and they’ll manage those individual securities within the account.
Okay. So you might have a domestic stock manager in an SMA, and they just run that, do their thing in that particular account. And you might have a different account for a bond manager, you might have a different account for a different kind of an asset class, and each of those folks does their … but, they’re in separate accounts, so they’re cordoned off from each other, and there are some inefficiencies that result from that.
Exactly right, the single account. Which allows for so much efficiency, right? It’s obviously easier when it comes to tax time to have a single account versus multiple accounts, and then we go back to the benefits of tax loss harvesting at the account level, and the ability to rebalance.
Okay. Then, let’s back up to SMArtX, and let’s talk a little bit about … We have the legacy way of doing it, through getting pooled investments through a mutual fund or something like that, and then the next step was the SMA, because you’ve got a manager running an individual investor’s individual investments. And then, you have the third party asset manager, the TAMP, where you’ve got a platform full of these folks, so you can pick a few different SMAs, all for one client, and have it under a common platform.
Sure. SMArtX, my firm, has two separate products, or divisions. They’re not really separate, but there’s two ways that we address the marketplace.
Okay. Before we go onto the next division, if you can translate that into something that I could understand. Just kidding. But, just for people who aren’t used to this kind of language, tell us what an API is, and tell us all that stuff you just said, about the opportunities. Can you give us an example to illustrate, if people really aren’t familiar with that language?
Sure. API is an application protocol interface, so what that allows is you to be able to take the information, and digest it within your own system, and then repurpose it and provide the information in a way that, again, fits within your system.
Okay.
So you’re working with enterprises, are you also working with individual advisors? Can you educate me a little bit on how you’re working with the marketplace?
Sure. Yeah, that’s the other portion of our business. The one portion would be the enterprise side, and to that end, by the way, we’re in very deep discussions with some very, very large firms, to be able to provide them a license to our technology to be able to power their own systems.
Can you talk to me … We talked a little bit about this at the outset, but as you’re speaking it’s really getting me thinking about the current environment, advisors who are all working remotely now. But, may choose to have more of a digital presence, may choose to outsource more of the functions going forward. Are you seeing the current environment driving that trend?
I think so. I mean, I have, over the last month, seen a number of new people come to us that said, “You know what? We’ve been doing this our self, and we’re done, and we just want to move forward.” I’m kind of seeing that at the OCIO level, and we’ll talk about that, but most of what I’m seeing now are folks that have been using TAMPs, or have other services, maybe they’re not a TAMP, maybe it’s an investment platform of some sort, and want an upgrade. They want better tech, they want better service, they want better functionality, and that’s something that, happily, we’re able to give them on our side. But, I’m not necessarily seeing folks that have come from nothing, and now have just capitulated, and thrown in the towel. I’m sure they’re out there, but I just haven’t seen a lot of that.
I wanted to talk to you about the outsourced chief investment officer function, or role. But, just as you’re talking about all of these things that advisors can do, how do you see this impacting the quality of the client experience, or the level of engagement that advisors can have?
So, when you say impacting the engagement, engagement with the client?
Yeah, I’m just wondering generally how the work that you do, or firms like yourselves, how that improves or enhances the client experience?
Oh yeah, I think it’s a big benefit for the client, of course, because they now have the opportunity to … As opposed to just talking to the advisor, and the advisor putting together some portfolio, they’re looking at historical returns, many times that are 10 or 20 years, coming from really established organizations that have a specific focus on their area of expertise. And being able to take those strategies, and combine them together, to create, again, one portfolio that makes sense for that user.
Well, that’s the argument for a TAMP. I guess, what we’re trying to ask is how does outsourcing some of those higher level, back office things like a CIO kind of a position, or something like that, how does that actually trickle down to the client engagement? It sounds to me, anyway, that the way that most advisors would describe the managers they choose on a TAMP platform is pretty much what you’re talking about. So, if they bring on more services like that, whether it be an internal CIO or an outsourced CIO, how does that change that interaction with the client, and change the client experience?
That’s a great question. For us, we provide the advisor with a lot of material, a lot of fodder. So when they sit down with the client, they’re not just referencing a couple of strategies individually, they’re looking at the entire portfolio. We’re going through with them, depending upon the level of engagement, maybe their existing portfolio versus the new portfolio, why we’re making this adjustment, what the efficient frontier looks like, and where we’re able to mitigate some of the risk, and reduce some of the returns. So it really is providing the client with a very detailed roadmap, very specific as to what you’re doing and why you’re doing it. Also, again, some of the benefits along the way, of doing what you’re doing.
Let me pick up on that, because I’m interested in your perspective on how advisors can communicate the value of outsourcing. I know this is one of the questions that come up a lot, some of the discomfort, even, that advisors might feel, that somehow this is their role. What do you recommend to advisors, on that front?
It’s interesting. They’re outsourcing anyway, Julie. If they buy a mutual fund, that’s outsourcing. If you’re buying an ATF, you’re paying an expense ratio, and to an extent, that’s outsourcing. Much in the way that you’re picking those securities, how you’re picking strategies, you’re picking managers. You still have some say as to the portfolio composition, but as opposed to picking individual names, you’re picking strategies.
Why don’t we just continue down that path, then, and maybe you can share some more examples of how advisors are working with that OCIO team?
Sure. There’s three ways, I think, that clients really interact with the OCIO team.
Right.
So they’re total portfolio solutions, they’re TPSs, and they’re really, really easy. Just come in, like I said, drop and drag, point and click, and you’re done. Those are already there, you don’t even have to talk to the CIO team about those necessarily.
Okay. We’ve talked about that a bit, and I want to make sure that we get to another topic or two before we finish. One in particular is that you are largely a technology based trading platform, and that kind of platform has gotten some unfortunate press recently, with the Robin Hood debacle, when the market first started going down. All of a sudden, the volume spiked, and direct to investor platform Robin Hood shut down for, I think, the better part of a day, in the middle of an incredibly volatile market.
Sure. I actually tweeted a lot about that Robin Hood outage, because it’s not only irresponsible, but it’s unfathomable to not be able to trade your account, specifically during the most volatile days that the market has ever seen. I mean, it’s just incredibly careless to not have backups. That’s where the FINRA came out, and I think there’s some discussion there, about charging these guys because they didn’t provide an alternate way to access those accounts.
Okay. Before we wrap up here, tell us a little bit about how an advisor can use some of the tools that you’ve talked about so far. So, assistance with investment management being outsourced, CIO, and UMAs versus SMAs, how can advisors build an experience that would separate them from other advisors?
Sure. Yeah, a couple ways.
Well actually, Evan, I don’t want to get too specific to SMArtX, I’m talking generally about, if somebody wants to be able to incorporating more outside investment management help, or leveraging things like UMAs rather than SMAs. Just generally talk about that, as opposed to … I don’t want to make it too specific because I want to make this a useful thing for people, wherever they may be, custodying stuff.
Understood. Yeah, I don’t think it’s very difficult. It may sound more difficult than it is, but candidly, it’s just like analyzing a mutual fund. I mean, you’re looking at a strategy, and deciding whether it makes sense for the client. Using the platforms themselves, again, I don’t want to be specific to our platform, I think all the platforms are generally fairly easy to ramp up.
Okay. Well Evan, if people want to find out more about you, or about SMArtX, where can they go to find that out?
The best place would be smartxadvisory.com.
Okay. Well Evan, thanks very much for joining us, it’s been really interesting talking with you.
Yeah, thanks so much.
The pleasure’s mine, thanks so much for having me, Steven.
Hi, it’s Julie again, it was great to have you with us on Becoming Referable. If you like what you’ve been hearing, please do us a favor and rate us on iTunes, it really does help. You can get all the links, show notes, and other tidbits from these episodes at becomingreferable.com. You can also get our free report, Three Referral Myths That Limit Your Growth, and connect with our blogs, and other resources. Thanks so much for joining us.