Money Meets Tech

At Steel Peak Wealth Management, the single biggest expense is the payroll. The second biggest, said founder and Chief Executive Reza Zamani, is for technology. The Woodland Hills money management firm uses financial planning software from such providers as Envestnet | Tamarac and MoneyGuidePro and also invests in creating apps and portals for its clients to access their portfolios. “That is where the cost is,” Zamani told the Business Journal. “You have to spend money in order to provide a high level of service to clients.” Long considered a personal touch business, money management companies are finding that technology is vital to their businesses. Many industry professionals in the Valley interviewed for this story mentioned technology as bringing about the biggest changes in their industry. Zamani had the opinion, though, that a lot of wealth management companies are not utilizing the best technology available. From a practice management standpoint, to properly manage money for clients the use of better technology is needed in order to meet regulatory standards as a fiduciary advisor, he said. “You can’t possibly do that without having technology in place that can allow you to properly manage a portfolio,” he added. At Steel Peak – No. 9 on the Business Journal’s list of Money Management Firms – clients are given no paper statements or paper of any kind. Their portfolio instead is access by a personalized website. “It is updated regularly because we don’t have to generate 50 pages when things happen in their lives or things happen in the markets,” Zamani said. Jason Sands, a managing director and financial advisor in the Woodland Hills office of Ameriprise Financial Services Inc., said the industry has changed and the role of a money advisor has changed due to so much information being available from the internet and financial news networks. When the U.S. tariff dispute with the Chinese caused volatility in the markets, technology can be used for planning and cash flow analysis to be able to see how it will affect the goals and objective of a client’s portfolio in the long term. “We can create an analysis almost instantaneously,” Sands said. “Twenty-five years ago, we weren’t able to do that.” Craig Pfeiffer, chief executive at Money Management Institute, a New York trade group, said that technology has brought change to the industry in three ways. The first is in providing model, or standardized, portfolios; the second involves activities around trading and operations; and the last is in the access to information and data. It used to be a money manager had to dig around for exclusive information but now it is all readily available, Pfeiffer said, adding, “Nuggets are harder to find, if you will.” Declining revenue According to a quarterly report from the Money Management Institute and Boston-based Cerulli Associates, there was $6.1 trillion in managed assets during the fourth quarter of last year. That is a 7.4 percent decrease from the third quarter of 2018 but a 1.2 percent increase from the fourth quarter of 2017. On the Business Journal’s list, PNMac Capital Management, a subsidiary of PennyMac Financial Services Inc., in Westlake Village, ranked No. 1 with $7.8 billion in assets under management. Wealth Collaborative Inc., in Westlake Village has just more than $500 million in assets from about 185 clients. It was No. 13 on the Business Journal’s list. According to President Jeff Wheeler, his firm’s clients come mostly from the entertainment industry – actors, writers, producers and cinematographers. “We work closely with their business managers to manage their wealth,” Wheeler said. Like Zamani, Pfeiffer and Sands, Wheeler identified technology as the biggest challenge the industry faces. At Wealth Collaborative, Wheeler and the staff talk with tech consultants and attend seminars. Wheeler counts among his staff older millennials who easily stay on top of the latest tech trends. “I am not a big fan of technology for technology’s sake, but if it can do something to enhance the client experience then I am all for it,” he said. But what about the non-tech issues in money management? Pfeiffer said the economics of the industry presents its own challenges. Revenues have declined from 3 percent to 5 percent over the past couple of years while expenses have risen. On the income side, the practice of revenue sharing between all stakeholders – advisors, fund administrators and asset or portfolio managers – has resulted in thinner margins. “There are more people with hands in the economic pie,” Pfeiffer said. One way for firms to deal with the economics is through consolidation. Small firms combine with small firms or get bought out by larges ones, Pfeiffer said. “At all levels, they are creating scale to deal with the revenue as well as the expense challenges,” he added. Christopher Lamia knows firsthand about consolidation in the money management industry. His firm Lamia Financial Group Inc., in Thousand Oaks, became part of Forum Financial Management LP, in Lombard, Ill., in January. Lamia went from being a $300 million local advisor to being part of a nearly $4 billion national advisory form. He described his practice as being a financial planning office that does asset management. He and his staff take a holistic approach and look at everything in developing a plan – insurance, tax, estate and retirement planning. “As needed, we work collaboratively with outside accountants and attorneys and insurance professionals, so we are getting the advice we need for the client,” Lamia added. At Wealth Collaborative, the planning process starts with the client identifying five things that they value, Wheeler said. That could be traits such as honesty or integrity or it could be travel or spending time with family. Once the values are picked, they are developed into life goals. And from there a financial plan and portfolio is created to meet those life goals, Wheeler said. “That is a financial plan that people will implement,” he added. Fiduciary confusion Zamani noted that one area of concern for him is how the industry has three types of advisors – brokers, or licensed representatives with responsibility to the firm they work for; peer fiduciary advisors that take liability for what they do for clients; and a combination of the two that wears both the broker and fiduciary advisor hats. “That is a big problem because I highly doubt that advisors tell the client every single time, ‘In this capacity I am not a fiduciary,’” Zamani said. “The client hired you based upon you being a fiduciary, so act like it.” Wheeler said that one area he’d like to see the industry improve is in the use of behavioral finance and financial psychology. Both these disciplines get into the minds of clients and help them understand why they have made the financial decisions they have. The world is a much more volatile place and that is reflected in the markets. Clients have a hard time managing that volatility and thinking long term, Wheeler said. “If you have training in behavioral finance and financial psychology, you can do a lot to allay their concerns and empower them,” he said.