And as we move deeper into the direct indexing space, our long-term focus on fundamentals has given us myriad advantages out of the gate. There is a large appetite for scale in the direct indexing market, both in terms of the facility for a financial advisor and their team to manage an increasingly large book of accounts, as well as the need for the technology to be economically viable with larger books of business across asset managers or wealth management firms. Our foundation has served our clients very well and will continue to support future innovations.
Hortz: Do you see other broader demographic and marketplace trends such as impending wealth transfer from Baby Boomers and the aging (and attrition) of financial advisors playing into these trends?
Blundin: Absolutely and, if you talk to the pundits, they will tell you that we are living in the largest generational transfer of wealth that has ever taken place. The needs, expectations, and appetites of the people who are receiving this wealth are quite a bit different than the generation that came before them and those expectations, even now, are rapidly evolving because the pace of change and technological innovation is so quick. Interestingly, the direct indexing product has several attributes that are very attractive to the next generation, some that perhaps are not as fundamental or central to the prior generation. We have a generation that has grown up aware of sustainability issues in a way that has not affected prior generations, and they want to make sure that their money is being used in ways that align with their values.
Whether it is Occupy Wall Street or the rise of cryptocurrencies, there is a lot of dynamism out there that is creating appetites for both investment products that are different, but also client experiences that are different. I think this is one of the other interesting challenges for financial advisors. The industry as a whole needs to evolve services and service models to meet the appetites of clients, it needs to embrace more on demand, self-service, and online approaches to client engagement. As service models become more consultative, the value proposition financial advisors bring to the table is very different than the legacy paradigm.
This trend has been unfolding over time. But, especially of late, the pace of change has been accelerating whether it be technology, online social interactions, new communication modalities, or new asset classes like cryptocurrencies. And I believe that is changing appetites more dramatically. You can even see that in the flood of private capital into a huge number of diverse fintech startups. The number of fintech startups that are out there is extraordinary. And they are attacking various aspects of this demographic shift of appetites to the way people consume financial services.
Hortz: How does Vestmark partner with advisors and wealth management firms to launch and scale fully customized SMA/UMA solutions?
Blundin: There's a lot of business variation out there, but the short answer is that just as advisors need to personalize their offering to investors, Vestmark can customize our solution and offering to do as much or as little as the financial advisor and their firm needs. This ranges from a fully outsourced investment product where we are taking care of all aspects of administering the product, to a la carte technology offerings that integrate with advisor systems or enterprise technology ecosystems. We understand how to partition our offering in order to meet the needs of the client and optimize what they need vs. the cost of the tech.
The other dimension is that we are a single platform that supports a diversity of needs and so oftentimes, a firm can replace multiple systems and old technology silos with a single VestmarkONE platform and have a streamlined experience and holistic view as a result of that. An investor’s experience on the Vestmark platform might start with a mutual fund wrap product and grow to be an SMA, or a UMA or direct indexing product over time. A single platform that can support both the consumer lifecycle, as well as the advisory lifecycle, can become a grand simplification for the advisor firm.
We consult with client firms and work with them to figure out how to structure a solution that is going to best meet their needs going forward. We also have a variety of service offerings, so any firm choosing an a la carte approach can choose from service offerings in addition to technology offerings to plug the gaps in their operational model or create immediate scale.
Hortz: Any other recommendations or thoughts for advisors and wealth management firms in developing their Managed Accounts business?
Blundin: The most progressive advisors are thinking very carefully about what their value proposition is and how that value proposition needs to evolve. If they want to retain and grow on the back of generational transfer of wealth, things that they have done in the past may not work as well for them going forward. As an example, there is tremendous growth in the alternatives space, with private equity and other kinds of alternative investments becoming an expectation and important part of an overall asset allocation. Crypto as a general class of tokenized or digital investment is also coming and gaining adoption. Advisors need to embrace this and build these into their overall portfolio solutions.
For the moment, retail adoption of these asset classes is small in comparison to traditional asset classes, but they are growing quickly and are inevitably going to become a dimension to clients’ portfolios. To keep pace, you need an underlying platform that will embrace new investment products, asset classes and portfolio solutions, and do it in a way that keeps the advisor and the firm operationally efficient, so they can continue to grow in a profitable way.
The data tells us that consolidation will continue and that implies advisor practices and advisory firms will grow. As the number of financial advisors in the United States declines and drives consolidation, the assets and clients a firm will manage will expand. This demands a platform that can scale to accommodate growth, provides automation and operational scale so that firms can grow without the speedbumps of platform and technology churn.
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