"Fee transparency should be every firm's goal. Make sure that anybody working with you knows how their fees have been calculated and knows what they're being charged for. Provide a good client statement that has all of the right data on it. That's just good business."
— Seth Johnson, CEO, Redi2 Technologies
Seth Johnson has over 20 years' experience in the industry, and has co-built Redi2 with a focus on respectful corporate culture and team with good communication, and clear accountability. He's an American history buff, a volunteer Boy Scout, and holds a degree in Finance from the University of Utah. In this episode, he shares some of the trends that are pressuring the traditional AUM pricing models.Now hit the Play button!
This episode of Wealth Management Today is brought to you by Ezra Group Consulting. If your firm is evaluating new technology or looking to improve your current wealth platform, you need to contact Ezra Group. Don't spend another day using technology that doesn't offer an elegant user experience. Your advisors and clients deserve better and you can deliver it to them with the help of Ezra Group.
Topics Covered in this Episode
- BillFin as a Differentiator
- RIA Pricing Models & the Millennial Subscription Model
- Mutual Fund Billing
- Fee Transparency
- Deeper Integration & the Big 4 Custodians
Companies & People Mentioned
- BillFin [02:59]
- BNY Mellon | Pershing [23:13]
- Black Diamond [18:32]
- Charles Schwab [05:58]
- eMoney Advisor [04:43]
- Envestnet | Tamarac [18:33]
- Fidelity Investments [04:50]
- Money Management Institute [22:56]
- NetX360 [23:23]
- Orion Advisor [18:31]
- RIABiz [20:24]
- T3 Enterprise [14:13]
- TD Ameritrade [05:56]
- Veo One [28:25]
If you are interested in more information about some of the topics John and I discussed, these blog posts would be useful:
Complete Episode Transcript
Craig: Welcome back and I'm glad you're here for another episode of the Wealth Management Today podcast. I'm your host Craig Iskowitz, and I'm bringing you new ideas from people on the leading edge of technology and innovation in our industry. I run a research and consulting firm called Ezra Group. We help broker dealers, banks, and asset managers make better technology decisions, and I'd like to remind you to hit the subscribe button so that you don't miss any future episodes. That would be terrible. So are you ready for this episode to start? Here we go.
Craig: I'd like to welcome my guest for this episode, Seth Johnson, co-founder and CEO of Redi2 Technologies. Hey there Seth.
Seth: Hi Craig. Thanks for having me on.
Craig: So glad you're here. I mean we can't seem to stop running into each other, the conference circuit and business the way it is. It's just been a couple of weeks where we seem to be in the same place.
Seth: That's right. It's been a good to see you as frequently as I have been seeing you recently.
BillFin as a Differentiator
Seth: Yes, absolutely. Redi2 Technologies is a leading provider of hosted fee billing and revenue management solutions. We actually focus in three different industry segments across the financial services industry. We have a product revenue manager for institutional asset managers so they can do their client billing, their accruals, and their collections. We also have a solution wealth manager that's catered to the wealth management TAMP broker dealer market, and that allows a wealth manager to calculate multiple fees, platform fees, asset-based fees across the board for their different intermediaries within the wealth management value chain. And we also came out most with BillFin, which is a cloud-based billing utility for financial advisors and we've got an almost 500 advisor firms on that solution today.
Craig: That's excellent. And there's so much going on in the advisor world and having multiple products that you can sell to different categories probably makes it much easier for these clients to pick which product they want to use.
Seth: Yeah, it's a real differentiator for our firm. What we found is that when you go into a situation where an asset management company or a wealth management firm needs a billing system to improve their back office operations, because the dynamics in the industry continue to change when you go in with a solution that just fits their specific business case the sales processes, it goes much more smooth. And the win rate, it continues to increase for us as we cater our pitch and our product sell to the appropriate end users.
Craig: And having multiple products, you're not just on the asset manager side, you're not just on the sponsor side, you're not just on the RIA side, you see all of them. So that gives you a unique view of the industry, and that's why I wanted to talk to you. So one of the biggest stories in the news is zero fee commissions. That's been sweeping the industry, and one of the things we were discussing was how it's going to impact custodians. So what's your take on how custodians will respond and how their revenue and business models are going to be changing with zero trading, zero ticket charges?
Seth: Yeah, that's right. I was actually at the eMoney Summit in mid October. This was about three or four days after Abby Johnson announced that Fidelity was going to to zero fee commissions. And what an evolving time in the industry to see these changes take place? So what does that mean for our business and how are we going to evolve our company to prepare for that? What we see is that there is a potential that these RIAs who have been parking their assets that they've been managing on behalf of their clients, that they've been able to to put as much money into the custodians accounts without being charged any fees on that because the revenue was being generated from these trades. So it's going to be interesting to see how the custodians are going to going to evolve to continue providing a high level of service but yet in the wind of losing hundreds of millions of dollars of revenue. So is there a situation where TD or Schwab would charge their RIA client base a custody fee to offset that loss? The RIAs are sure hoping that that's not what happens, but we could see that. We service some large custodians right now that are using our billing system, and it's fair to say that we don't service the trade commissions, that's not really the core of our product set. We are experts in asset based billing, and so it could be interesting to see if the custodians come knocking on our door to say, Hey, we now just started charging all of our RIAs an asset based fee and we need a billing system to start collecting our revenues. Now, some also say that they're just going to come to the RIA client base with the additional value added services that they would be able to get an upcharge for bringing more tools to market. And what we're seeing is that they do want to bring more utilities, more solutions that the RIA can use for a personalized experience for their end investor. And so they may be upcharging for some of of those new tools that they present to them.
RIA Pricing Models & The Millennial Subscription Model
Craig: Yeah. There's so many more ways that RIAs could bill now. And do you think that it is, in one sense, freeing for all RIAs if we're talking just that sector? In the past, if you're an RIA, you're charged assets to your clients, an asset based fee, that was it. There's no other option. Now with the subscription model and ticket charges going away, it could open up these different pricing models for RIAs, they could charge 1% of income, I heard Michael Kitces talking about, or on an hourly fees or these other different ways to charge.
Seth: That's exactly right. Yeah. What we're seeing, especially within the clientele that we're working with on the BillFin product that's specifically designed for an RIA firm. We've got nearly 500 RIAs that are licensing that solution now. They're coming to us and we're having a lot of dialogue with them in regards to the different fee types that they need and they want to charge. And so like you said, it's not just the asset based fee that they're looking to pass on to their end clients. They're talking about how can we use a subscription model? How can we enter in a fee that's by the hour? How can we enter in a fee that we can maybe assess their net worth? And so with the flexibility of BillFin, of course we can that. But what we find is that when there's a billing system that houses all of your revenue data, whether it be for an RIA, whether it be for a TAMP, whether it be for an asset manager, that system now becomes a business decision making driver where you can have a view into your revenues and even forecast to basically make some decisions as to how you want to run your business. And that's something that we've seen and we've actually worked with some of our clients on to give them a view into data. Even if we pair it up with expense data from their general ledger to get a better view into what's most profitable for them. What actions and what clients are driving more of their profits and where do they want to spend more of their time and energy. We even had a client, this is on the institutional asset management side, after they did this analysis, we had a client that decided to sell off their entire private client business and they just kept the institutional money management but the board of directors was empowered to make that decision because of the work that we did with their internal team to match the revenue data with their expense data. And they did the profitability analysis, and made the decision that the private wealth businesses is what they were going to sell and they were just going to focus on the institutional business.
Craig: And that's how the billing system paid for itself.
Seth: Yeah. Their ROI was quite high.
Craig: That's also true on the RIA side, I was going through some of my notes from a previous conference where a TAMP mentioned that he was shocked by how many RIAs don't understand their break even point when they're considering these different pricing models.
Seth: They've got to really sharpen their pencils on that. With the appropriate billing system in place, if you have an RIA that's considering this concept of moving away from asset based fees and going more for a subscription model, which many millennials are very interested in, if you capture all that data within a billing system, you can do some forecasts and run those models to be able to make sure that you can identify and project out that revenue to make sure you're covering your costs. Cause that shift just defines your practice at that point as to how you're going to capture your income for the value that you're providing. This whole concept of the subscription based financial planner, or the retainer that's put in place for your financial advisors is getting some traction.
Craig: There's enough different firms out there that are willing to try different business models.
Seth: And the better handle they have on their revenue data, the better decisions that they're going to be making.
Craig: It seems to me that not all the custodians will follow suit necessarily, but they could start charging custody fees to RIAs or maybe they could charge be charging subscription fees.
Seth: Yeah. It'll be interesting to see how that evolves.
Craig: But either way they could use a billing system to help them figure that out.
Seth: Yeah. And just at this conference that we were both at earlier in the month, this is a T3 Enterprise that Joel Bruckenstein did a fantastic job on, when we were in those panels, it was clear that this personalization was becoming such a key factor in how these RIAs differentiated themselves and all of the technology that's being brought to the market and the new innovations. More and more what we're seeing is that the technology that's personalizing the investment experience for the end investor are the technology trends that are really catching a significant wave. And one the things that we're seeing within our business development efforts is that there are broker dealers out there that are supporting their advisors, their community of RIA firms, or however you'd want to map that out. And what we're seeing is that with the back-office billing operations being done at the home office with a handful of people with the green visors that are cranking away, making sure that everything ties out. And what we're seeing is that with this more user friendly billing technology, is that there's a dialogue about how they can take our billing system, which was designed for the entrepreneurial financial advisor, and empower them to have access to the fee rules and the fee schedules so that they can use that in order to make their own changes and to give the discounts to those clients that they want to give those discounts to. But it's more that they want their RIA firm to have more power and more control over the fee process. And so these discussions are a lot of what we're seeing in 2019 and going into 2020, there's a lot more firms out there that are going to have a desire to empower these RIA firms with better technology to have a more personalized experience for their service. And that's something that we find ourselves discussing with large firms, to help them empower their advisor clientele.
Craig: I mean, my firm does a lot of work in that area, reviewing products, and one of the things we hear a lot from vendors is our product enables personalization at scale personalization at scale.
Seth: That's right.
Craig: Like it's a very common marketing term for a lot of portfolio rebalancing engines and other software that you can scale up your business and also personalize.
Seth: So one thing that's of interest in that regard is, and I'm going to speak to BillFin again, and that is coming to market with that, it's been an interesting journey because this for us is kind of that B2C type of product that we've never had before. We grew up on the enterprise side and in asset management and wealth management and TAMPs, and coming down market and in really trying to focus on a client that can only pay or is only willing to pay $99 a month for a billing technology, that's our starter package. And what we're finding is that when a financial advisor, when an RIA goes independent and they hang their own shingle, depending on their book of business of course, we have clients with $2 million in AUM. I mean, they're just barely cutting their teeth, trying to get their practice started. They pay by credit card on a monthly basis, and then as they grow, they just can't afford a larger platform with the performance reporting and the billing and the reconciliation and rebalancing. And so, Orion, Black Diamond, Tamarac, this is just out of their price range. And so these advisors that are just trying to build their book of business, it's been really satisfying to see that one of the first systems that they need after they choose the custodian, the very next thought they have is, How am I going to collect my revenue and I want that to be done right.
Craig: Because even if you do everything right, if you can't collect revenue, you won't be in business very long.
Seth: That's exactly right. The trend there is that once they get to about $90-100 million in AUM, some firms may move on to one of those larger platforms. And they always ask us, Hey, do you have that connectivity to Black Diamond? Can we use Tamarac and still use your billing capability? And so yeah, of course we've knocked on the doors of those firms to talk to them about that. Cause they have billing capabilities, but it's just not their core focus. They have a team of engineers, and their best engineering talent typically is on performance reporting. It's on the user experience. It's on the client portal and rebalancing. Billing sometimes gets neglected when it comes to the robustness of what they can offer. And so when you have a firm like Redi2 where that is our focus, the best engineers at Redi2 are constantly focusing on the billing experience and the flexibility of what the fee engines can do.
Mutual Fund Billing & Fee Transparency
Craig: So another thing I wanted to talk to you about was another RIABiz article about Charles Schwab zeroing out free fractional share trade ticket charges for mutual funds. Now what about mutual fund billing? How do you think that would change and how can Redi2 help them?
Seth: That's interesting. So I'm stepping away from all of the different avenues of the simply managed account business, right? But when it comes to mutual funds, you have the TAMPs out there that are doing Rep-as-PM mutual fund wrap, and our wealth management product handles that really well, the UMA specifically with this sleeve level billing. You get into the mutual funds, Charles Schwab and Fidelity, I believe Fidelity basically mentioned zero expense ratio on some of their mutual fund products. And we have worked with companies that have a heavy set of mutual funds, but what we're seeing is that that's an industry segment that we've targeted and that we have traction on, to the point where our clientele includes mutual fund complexes which is something that we're excited about. There's tremendous number of assets in mutual funds and there's a lot of firms out there that still have to calculate those expense ratios. And that's something that we're interested in.
Craig: It's all interrelated. I mean, it's all connected, and it's hard to set apart these different firms because they all work with each other and they're all dependent on each other.
Seth: That's right. Yeah. We see our target market as, you take the top 500 asset management firms in the industry on the institutional side. Once they get to the top 500 asset management firms in the world, you're at that $2 billion in AUM point, $2 billion and below, is our built in target market. But then we find that in wealth management, there are a number of firms that have a significant managed account book of business that's been growing. We started working with the MMI back in 2007 is when we were introduced. And at that time, we were so focused on institutional asset management that this was a whole new world for us. With the work that we did with Pershing, there's press releases out there so I can definitely mention them as a client, but their managed account billing capability that's embedded into NetX360, that is the hosted solution that we came to market with after we had succeeded on that project and gone live. We productize that and came to market with Wealth Manager Enterprise. There's a tremendous value add that these wealth management firms need to handle. The complexity of the managed accounts, and of the different programs that they're making available to advisors to set that fee schedule up once that might be only available for a specific amount of time, but all the accounts that are opened up within that program, all of the fee rules, don't need to be set up by account. They just inherit those rules. But then if there's a need for an override at the account level, that's definitely available. And that's something that has gotten more traction as the managed account assets have ballooned over the past five to 10 years, because during the final years of the Obama administration, we experienced a significant amount of work, consulting effort, and implementations of firms that needed to have something that offered greater fee transparency to prepare for that regulation that of course, never came to be. But good fee transparency is always a good business. Making sure that anybody that it's working with you knows how the fees have been calculated, knows what they're being charged for. It has a good report, a good statement that has all of that data on it. That's just good business. And so more and more firms have wanted that granular level of detail and that's what we empower these firms to do.
Craig: And you've been working with Pershing for quite some time now.
Seth: We just passed the 10 year anniversary of them going live and they're definitely fighting the good fight. I believe they're the ones that did not eliminate their trade commissions.
Craig: No they didn't, they're holding fast.
Seth: They're keeping steady. But they definitely have a fantastic offering for their IBD clientele and they've just been growing for many, many years. As the shift in the market has changed from many of these teams breaking away from wirehouses and going to different channels, we've seen their business grow.
Craig: And Pershing was always the number one custodian for broker dealers and just a couple of years ago they started a big push in the RIA space for their RIA custody unit.
Seth: Yup. That is right.
Craig: And growing very, very nicely for them as they've been, Mark Tibergien's group has been pushing that message out.
Seth: Yeah. He's been doing a great job with that.
Craig: There's just a lot of competition in the RIA space for whatever their needs are, whether it's software or other services or custody. RIAs seem to be swamped with offers for newer and better stuff.
Seth: If you're an RIA today, you definitely have not only plenty to choose from on the custodian side, but then just the technology that's out there just keeps on coming. Lots decisions to make if you're running an RIA today.
Craig: But your BillFin product integrates with all the major RIA technologies doesn't it?
Seth: Yeah. When we brought BillFin to market, the way that we knew that we would get adoption was building the connectivity to TD, Schwab, Fidelity, and to Pershing, the big four custodians. We also build connectivity to RBC. But that is what really established us as a viable option because they're the technical consultants, Schwab or TD, is we really tried to get to know them well by attending TD Link, Schwab Impact and we just tried to build as many relationships as we could with the technical consultants and the relationship managers so that they could get the word out. And one of the things that went into production for TD right before Thanksgiving, is a deeper integration with with Veo One. And so today, the integration is such that if you're an RIA, you sign up, you sign your release of information form, and you can bring your account positions and transactions into BillFin with a click of a button. It takes about two to three hours to implement the solution and to get all the accounts in the households correct and then the fee schedules uploaded.
Seth: But once you have that done, the normal connectivity is just to bring in those accounts on a monthly basis or a quarterly basis, with the click of a button. And then the fees calculate right there on the fly and you've got your fees ready to be reviewed or ready to upload back into the custodian platform, whether that be Schwab or TD. But with Veo One we've completed the full circle automation where there's another button that you can click within the BillFin application that actually sends the payment file back into Veo One. So that's kind of the full handshake of receiving the positions and then pushing the fee data back so that the RIA can get paid in a very timely fashion. They don't need to download the CSV file to their hard drive, then go log into Veo One and then upload that and go through that process. So we're really excited that we've deepened the integration with TD. And one of the cool things we did with Schwab was the insufficient funds validation. If the RIA before they sweep the fees after the calculation, they can click on insufficient funds to make sure they understand the fee amount that's going to be deducted from their cash counter, their suite count, and they'll do the validation to make sure that those fees are there within their Schwab account before they send the payment file to Schwab. They can reach out to some of their clients that need to get more money into that account. It has been heavily used ever since we brought that to market, the APIs that we put in place to make that happen have been very successful. And we hope to extend that to the other custodian integrations that we have as well.
Craig: Yeah. It's only a matter of time. Everyone's going to want this. Everyone wants a deeper integration. Everybody wants to be able to do things at a click of a button. No more file exports, imports. It's all gotta be straight through processing.
Seth: Yeah, that's, that's the trend. That's where we're going.
Craig: I'm glad to see that Redi2 is on top of the trends. So where can people listening to this, RIA asset managers, broker dealers and others, find more information about your products?
Seth: Well www.redi2.com is our website, we have all three products on there. And then you can request a demo, and phone numbers are all there on the website as well. But just email me, I'll make sure that you get taken care of.
Craig: You go right to the CEO!
Seth: If you want our software then let me know. I'll make sure that the right people are notified.
Craig: This is a special just for listeners of the WMToday podcast, you're getting access.
Seth: Just for listeners of Craig Iskowitz's podcast.
Craig: No one else gets this information, I'm not going to post that.
Seth: And they have to listen to the full extent of the podcast.
Craig: Right! Seth, thanks so much. This was really helpful, I really appreciate your time.
Seth: Well, thank you for the opportunity and I appreciate you covering what I feel is very important fees within the financial services industry.
Craig: That's right.