It is a great time to be an independent RIA. At least when it comes to technology. There seems to be an endless supply of tools for automating, optimizing and generally improving the efficiency of an advisory firm's operations.
This is especially true in what we like to call the robo-platform or digital advice space. Innovative companies such as Jemstep (bought last year by asset management giant Invesco), Advisor Engine and Betterment developed cloud-based software that enables firms to offer automated, online services. These have most often included tools for prospecting, risk profiling, data aggregation, portfolio analysis, new account opening (completely electronic, no paper required) and client portals.
But these digital advice vendors all had to integrate with their clients' portfolio management and other back office systems. This did not seem to be an issue until the vendors supplying those systems realized they needed to get in on the act.
As the market has matured, bigger players like Envestnet, Vestmark, and Fidelity (to name a few) built their own digital advice tools to complement their end-to-end wealth management platforms. Other companies with a focus on the front end of the advice process, like Riskalyze, saw the need to expand into portfolio management by building out their own functionality. (See Riskalyze Expands Beyond Profiling to Become a TAMP Supermarket)
This is an industry trend that cannot be ignored. The innovation phase is over. Now that almost all platform vendors and the Big 4 RIA custodians all have digital options available, the writing is on the wall. You need more than just fancy front end software to stay competitive long-term.
Leapfrogging the Competition
Another of the innovative providers of digital advice technology, Chicago-based Oranj, just made a bold move to try and leapfrog their competition and become an end-to-end wealth management platform. Last week, they announced that they were buying a majority stake in TradeWarrior, a provider of portfolio rebalancing software.
A recent survey reported that 80% of advisors either have some type of robo offering or are planning to launch one in the next six months. The low hanging fruit of RIAs is pretty much gone. Once a firm selects a vendor for their digital advice channel, a lot more time and effort must be expended to replace them. (See How RIA's Can Survive the Wild West of Roboadvisor Technology – Kitces)
This is even harder when it is an all-in-one solution since the integration between the front and back ends will be tighter that a combination of two discrete vendors.
The advisory market is fragmented with numerous competing business models, observed David Lyon, Founder and CEO of Oranj during a call to discuss the deal. He has taken his firm in the direction of trying to control everything on the front office side. Their goal has been to build software that communicates and collaborates with clients in the way they expect to be serviced today.
We reviewed Oranj here a while back (See Oranj David Lyon: We're The Un-Robo-Advisor) and covered TradeWarrior in our Best Portfolio Rebalancing Software review that went live on Michael Kitces' blog today.
Oranj has been flying under the radar the past few years while the spotlight has been hogged by bigger competitors. In spite of their lower profile, Lyon told me that they now have around 1,800 advisors using their platform across 500 firms. This includes independent fee-based RIAs and hybrid reps/dual-registered reps.
This is a pretty decent client base for company that is privately funded and has taken no outside capital. Add to this the 150 or so TradeWarrior clients and you are looking at a combined firm with market share that should make the major players take notice.
This will put pressure on Oranj and could make it harder to continue to grow at the pace they have the past few years. However, their size can continue to work to their advantage.
Being small will give Oranj a leg up in their ability to iterate and bring more innovative features and functionality to market quicker than their larger peers. This is "The Innovator's Dilemma," which says that the larger and more successful a company becomes, the less ability and opportunity it has to develop innovative products.
Oranj needs to grab every advantage possible, since the competition is not sitting still. Another small player, Marstone, has made splashes in the news by partnering with Pershing and Fiserv. These deals will not only provide Marstone with a pipeline of prospects, but also added name recognition. This is important when fighting for market share in a crowded field since many clients will not look past the three or four names they know when choosing a vendor.
This deal will generate some buzz, but Oranj will require a coordinated marketing campaign going forward to keep them at top of mind with advisors.
While most of their platform functionality is similar to their competition, Oranj takes a 'more is better' approach when it comes to data aggregation technology. Every other vendor I have spoken to uses a single data aggregation technology, but Oranj uses three: Yodlee (owned by Envestnet), Quovo and ByAllAccounts (owned by Morningstar).
Why so many? Oranj has learned over the past four years that each aggregation firm has different strengths and weaknesses, according to Lyon. So they mix and match the services:
- Yodlee – used for consumer finance data such as bank accounts and credit cards; Yodlee has better data here due to their enterprise agreements with major banks that provides them with direct feeds and avoids screen scraping;
- Quovo – used for custodial data since their strength is cleaning and normalization;
- ByAllAccounts – used for held away investment account data.
This combination backs up Lyon's assertion that Oranj is an "aggregator of aggregators". Oranj has taken a page from consumer-facing products like Mint.com by including real estate values from Zillow in their aggregated household wealth reports. (See 4 Robo-Platforms Go Head-to-Head at T3 Conference)
Oranj has had a relatively easy time selling the past few years since the market for digital advice was in its infancy. Not that every platform vendor and custodian has at least the basics of a digital solution, offered very cheap or even free, Oranj will need to highlight the features that differentiate them from the competition to continue closing deals.
One aspect of their platform that Lyon feels is a differentiator is how their client portal can be used to work with prospects. This is unique feature since every other client portal requires the users to be, well, clients. Oranj allows the advisor to create profiles for prospects, with minimal manual data input, which give them access to the portal.
"We're laser focused on providing advisors with a digital extension of their business," Lyon explained. They believe that client onboarding begins in the first referral meeting and their client portal helps to support this.
Lyon shared with us that Oranj advisors have fewer quarterly/annual in person reviews with their clients than the industry average. Most of them leverage the Oranj digital tools to connect with their client online rather than face to face. This is a trend that we have seen before. (See 25 Awesome Financial Advisor Technology Tools)
While they are not expecting to replace the #1 RIA portal provided by eMoney Advisor, they do think that their is more user friendly, especially when assisting users with online account transfers, Lyon proposed.
Cross Selling Opportunities
One driver behind this deal was opportunities for cross selling both products to the other's client base.
TradeWarrior brings a lot of experience integrating with external vendor systems since they were founded back in 2010. Oranj can learn from these different combinations to ensure that they bring similar value to the table when pitching to the TradeWarrior client base:
- Redtail + AssetBook + TradeWarrior
- Junxure + BlackDiamond + TradeWarrior
- Salesforce + Orion Advisor Services + TradeWarrior
Oranj has their share of experience with integrations, although from a different angle. 70% of their clients are multi-custodial mostly using a combination of TD Ameritrade and Schwab. Many of the TDA advisors use iRebal, so Oranj will have to appeal to the multi-custodial ones with a smoother trading and operational experience than they currently have. This could include the ability to launch a portfolio rebalance from different points in an advisor's workflow, such as when changing a client's risk profile, Lyon suggested.
TradeWarrior's revenue grew 60% last year, Deru informed me, so that could be a good sign for the combined firm and cross-selling opportunities. (See What's New in Portfolio Rebalancing Tools?)
Is There Enough Revenue?
The list price for the Oranj platform is $175 per advisor per month. Based on 1,800 current users, but without including any potential discounts, my back of the envelope calculations total roughly $4 million in revenue. TradeWarrior uses a sliding AUM scale for billing so it is more difficult to estimate their revenue.
But assuming it is less than half of Oranj's, that adds up to less than $6 million all together. This is a rounding error for firms like Invesco, Envestnet or Fidelity when it comes to spending on technology.
According to Lyon, Oranj is aggregating around $180 billion in assets on their platform. This comes to an average of $100 million AUM per advisor, although the median value is probably smaller since they have a couple of clients with $1 billion or more in assets, Lyon reported.
In my opinion, this would mean their 'sweet spot' for client size is $50-$75 million, but Lyon disputed this. He insisted that Oranj does not have a sweet spot, since this concept is more closely aligned with performance reporting systems. Once firms reach a certain asset size, they will want to outsource, he insisted.
Hopefully, this is true, since Oranj is going to have to start moving upstream to justify the investment in TradeWarrior. Not only the cash investment, which is going to be used to hire more developers, according to Damon Deru, Founder and President of TradeWarrior, but also the time and effort that needs to be spent on integrating the two platforms.
Robo Platforms for Advisors
Oranj has made a statement with this deal that they plan to fight for new and bigger RIAs with their soon-to-be end-to-end wealth management platform. The problem is that the list of competitors is growing almost exponentially.
- Riskalyze built their own portfolio rebalancer and has a terrific user experience with a low price point.
- Orion Advisor Services just announced their rebalancing and trading system, called Eclipse, that they plan to push out to their client base and replace the standalone tools they were working with such as Total Rebalance Expert, iRebal and, of course, TradeWarrior as well.
- Morningstar Office is being expanding after their purchases of Total Rebalance Expert and ByAllAccounts with tight integration of Redtail.
- TD Ameritrade launched an advisor workstation built on top of Veo with iRebal at its core.
I don't have a crystal ball, but I like both the Oranj platform and TradeWarrior's software, so I feel there is a high probability of them being successful as a combined entity, assuming they can execute the merger without any major issues, like culture clashes, software bugs, or degrading of customer services levels.
I hate ending an article with the phrase "it remains to be seen…" but I'm going to do it anyway. It remains to be seen whether the combination of Oranj+TradeWarrior can succeed in the crowded wealth management technology platform space.