Below is the March edition of the Fintech Report Card, a monthly piece by Riskalyze CEO Aaron Klein originally published in WealthManagement.com.
Ellevest to Launch Fund for Women
What happened: Ellevest, the robo advisor designed for women and founded by Wall Street veteran Sallie Krawcheck, is launching a new fund to invest in offerings that help advance women’s issues. The fund includes investments that are targeted at having a positive social and economic impact through advancing women, which could mean companies with female executives or loans for small businesses founded by women.
Why it matters: Socially responsible investing has been a popular topic in fintech, so it’s no real surprise that a robo advisor with a mission to empower women to invest would want to create a fund to advance women. It’s also a natural progression for robos looking to create a new form of revenue (Wealthfront has done something similar). Would they add companies with generous family leave policies or would other factors come into play? Will this fund have a client-friendly expense ratio? Interested to see where it goes.
Orion Adds Alternative Investment Tracking Tool
What happened: Orion Advisor Services has added a free tool that tracks a client’s private assets alongside its public holdings for the 1,500 advisors on their platform. Orion advisors investing in alternative assets place anywhere between $550,000 to $5 million in them, and most advisors were manually entering data on their clients’ alternative assets. The Alternative Investment Platform Tool offers reporting alongside the public and future features will also let advisors apply changes to a private investment valuation for entire groups of clients who hold positions in the same product, saving advisors from account-by-account number crunching.
Why it matters: Orion is clearly on a mission to go up market and serve large, sophisticated RIAs (their sophisticated Eclipse trading and ASTRO direct indexing capabilities are a good indicator of that). It’ll be interesting to see how platforms like Tamarac and Black Diamond will respond.
Morningstar Using AI to Expand Fund Ratings
What happened: Morningstar, in an effort to increase the number of funds and ETFs it rates, rolled out new quantitative ratings that will cover more than 10,000 funds and ETFs. “We’ve been expanding coverage of funds through our analyst team for the past two years, and because of increasing demand for more coverage in the U.S., we realized that at some point we can’t hire 1,000 more analysts,” said Timothy Strauts, director of quantitative research at Morningstar. “The model has been in testing the past four years, and we’re comfortable launching it to the world.” Unlike human-based analytics, the quantitative analysis won’t involve text, nor will it include manager interviews as part of its ratings. Investors will see a rating of gold, silver or bronze with a superscript “q” for quantitative ratings produced by machine. Morningstar currently covers only 1,800 funds and ETFs.
Why it matters: This machine learning rating system makes it easier for Morningstar to keep up with the scale. It’ll be fascinating to see if Morningstar’s clients end up preferring the “q” over the “h.” Is it possible that AI might have less bias than a human analyst and produce more reliable ratings? You’ve got to hand it to CEO Kunal Kapoor—this is a fearless step into the future.
Auctus Opens Up Blockchain Retirement Testing
What happened: Auctus, currently working on a blockchain-based retirement planning platform, has opened a test version of its retirement planning system to the public. Auctus is basing its retirement planning platform on the Ethereum blockchain standard, and says their alpha test system shows how a robo advisor might help a user create a personalized investment portfolio.
Why it matters: I’m hugely interested in blockchain for things like transaction clearing and centralized ledgers, but what part of building a personalized retirement plan needs that kind of technology? This seems like a solution in search of a problem, but readers smarter than me can feel free to tweet what I’m missing to @AaronKlein.
The good news is, all Auctus needs to succeed are a bunch of financial advisors who (a) do financial planning for their clients and (b) have a good working knowledge of Ethereum blockchain technology, and are able to get MetaMask installed on their computers, acquire a thousand test tokens, and like the idea of recommending crypto to their clients. Heads up, we’ve found a new definition for “unicorn!”
YCharts Adds Crypto Data
What happened: YCharts announced that it has added the functionality for advisors to track and compare traditional assets to the 25 largest cryptocurrencies as measured by market capitalization. Though President and CEO Sean Brown said YCharts wasn’t aware that any of its advisors were “recommending crypto to their customers,” he said that all advisors are “trying to decipher what buzzwords like blockchain, crypto and Bitcoin mean, and how they interrelate,” and are trying to understand “whether this is a viable investment alternative that they can put their recommendations behind.” There’s also the potential to compare cryptocurrencies to oil, stocks, bonds, etc. and other recognizable assets, making volatility comparisons easier to understand for investors.
Why it matters: When it comes to volatility—data talks. We just incorporated the ability to model bitcoin in Riskalyze portfolios, not so advisors can recommend it, but so they can demonstrate the risk clients have by holding it. Whenever clients are interested in a new asset class, analytics tools like YCharts have a big opportunity for delivering insights.
Robinhood Quadruples Valuation in Less Than a Year
What happened: Robinhood is closing in on around $350 million in Series D funding led by Russian firm DST Global, bringing its total funding to around $526 million. The startup showed its ability to nimbly adapt to trends by building its cryptocurrency trading feature in less than two months and have had over one million users waitlisted for access in just the five days after Robinhood Crypto was announced. They also offer a subscription service with advanced features for $6 to $200 a month. In effect, Robinhood has figured out how to apply the freemium business model to trading.
Why it matters: Robinhood has succeeded in serving self-directed investors with a great business model that mixes subscription and transaction revenue, so it’s no wonder that investors are hopping on the train. For self-directed investors, this looks more and more like the future, but the big incumbents like TD Ameritrade and E*TRADE are watching closely.
AI Startup Digital Reasoning Raises $30 Million
What happened: Artificial intelligence startup Digital Reasoning has raised $30 million from a group of major banks, in a round led by French bank BNP Paribas. Launched in 2012, Digital Reasoning identifies unstructured communications data to add context to human conversations, as well as flags potential fraudulent activity hidden in those communications. Banks and financial institutions use its services for internal use to scan employee e-mails for fraudulent patterns or red flags. The new round of funding will be used to further build technology for natural-language processing as well as growing its product offerings for capital markets and wealth management companies.
Why it matters: This kind of communications tech could be interesting in the wealth management space. Could we use this communication intelligence to throw up red flags for conflicts of interest, identify when a client is experiencing stress or confusion, or use it to make better decisions?
RIAs in TCA Survey Say Tech Still Has Long Way to Go
What happened: Technology for registered investment advisors has come a long way, but it’s still giving them headaches, according to a recent survey of 227 RIAs by Trust Company of America and TechValidate. Out of those surveyed, 44 percent said the most challenging thing was that they were unable to use technology to its full capacity; 43 percent said it was inadequate integration; 38 percent said it was the inability to customize technology to their needs; and another 26 percent complained that the technology overpromised on features that didn’t deliver.
Why it matters: We have to agree: we need richer integrations and more intuitive tech that still allows advisors to pick best-of-breed technology. It’ll be up to us in the fintech space to make these changes happen. Companies like AI Labs, whose co-founder Lori Hardwick just joined the Riskalyze board, have done great work to address these problems. Yes, we do still have a long way to go, but we’re excited to tackle these issues head-on.
LPL Partners and Goldman Sachs Partner on Securities-Backed Lending
What happened: Advisors with LPL Financial can now offer clients securities-backed loans through Goldman Sachs Private Bank’s GS Select program.
Why it matters: Far too often, clients with hefty investable assets pay far too much for access to debt. If you need to loan money to your kids, or cover unexpected expenses until your next bonus, securities-backed lending allows you to do that at a great interest rate, without selling off parts of your investment portfolio. Kudos to LPL for finding a way to make this available without having to own a bank.
Arizona Becomes First State to Launch Fintech Regulatory Sandbox
What happened: As the pace of technological change in financial services continues to accelerate, legacy regulatory systems are struggling to keep up. Countries including the United Kingdom, United Arab Emirates, Singapore, Australia, Canada and others have implemented sandboxes of their own in an attempt to attract entrepreneurs to build local fintech ecosystems that will loosen certain licensing restrictions while still affording consumer protections. With the signing of H.B 2434, Arizona will become the first U.S. state to launch a sandbox for the development of fintech.
Why it matters: Having a sandbox environment to test new fintech without all the constricting regulations is a big leap forward. The only heartburn I have is that fintech doesn’t thrive in a patchwork, state-by-state, case-by-case environment. How many times have we seen fintech startups say “not available in Massachusetts” because they can’t take the risk of running up against the renowned levels of regulation there? We need the Securities and Exchange Commission to step in and try to get states to work together, so the United States can deliver one consistent market to innovators.
Aaron Klein is CEO at Riskalyze.
Editors note: The views expressed in this column are Aaron Klein’s, and do not necessarily reflect the opinions of Wealthmanagement.com.
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