Patrick focuses on ensuring the firm is in compliance with federal and state regulations for registered investment advisers and for advisers to mutual funds. He is also responsible for managing the operations of the firm.
In the interview, Patrick shares his vision of prospects of robo-advisor solutions and describes an ideal robo-advisor platform for his firm. We discuss whether financial advice can ever be fully automated, and the potential challenges for technology companies in the future.
Q: What is your background? How are you related to and how did you come to work in the wealth-management industry?
Patrick: I started my career at Northern Trust Bank in Chicago on the custody operations side of the business, and a little bit in securities lending. I was at Northern Trust for six years and then left to go to graduate school full time, where I got my MBA at the University of Michigan. After that, I was at Deloitte Consulting working mostly for insurance companies, helping them streamline their operations and do better in managing the data they had and reporting on it.
I then developed an interest in asset management and wealth management through interactions with some of my colleagues in consulting. I went back to Northern Trust, this time on the asset-management side. I worked for Northern’s multi-manager solutions business, which hired other money managers. That business primarily served ultra-high net worth individuals (HNWI), pension plans, endowments, and the like, and we focused mostly on asset allocation and finding the right stock pickers and fixed-income managers to manage their portfolios. I eventually became COO of that business unit, and did that for a few years.
Then I decided to do something a lot different and go to a much smaller firm, so I came over to Pekin Singer Strauss Asset Management as the CCO and COO, having responsibility for all the noninvestment-related activities of the firm. We are an 18-person shop that has two main lines of business:
- Wealth management, where we are serving HNWI, providing investment management capabilities.
- Broader financial planning services.
We’re also the advisor to a mutual fund and to a private fund. The mutual fund has been around for over 10 years and is a global value fund. The private fund was just launched last year and it’s very small.
We have a separate brand called Appleseed Capital that we use to market those services and to run portfolios for clients that want their assets managed according to their values and their interests. Client service, compliance, portfolio accounting and reporting, and trading are all my responsibility and I’ve got a strong team of folks to help me do that on a day-to-day basis.
Q: Could you please describe some of the trends you’re seeing in the wealth-management industry, particularly the kinds of software technologies that are being used in the industry right now?
Patrick: Over the last few years, we’ve seen a lot of change in wealth management with the technology people are using. There has been a much greater uptake of electronic processing capabilities in terms of onboarding clients, maintaining those accounts, and providing reporting.
We still believe at our firm that some clients continue to need more handholding and may not want the true electronic experience. But we certainly are seeing more clients and prospects expressing interest in moving to electronic capabilities, and that’s where we are a bit behind right now. We are trying to build up our capabilities in that space. It seems like a lot of providers are going to more open architecture, in order to develop as many relationships as they can with other vendors.
Some of these companies have recognized that they cannot be the single source for all advisors’ needs, so are trying to develop relationships with CRM firms like Salesforce so as to tap more seamlessly into their base accounting and reporting engine. Clients are open to all this. I still have a big question mark in my mind about whether all clients really want and need it. Many of them really just want to see a basic picture of how they are marching towards their long-term financial goals.
We also need to be ready for the market to change, as it always does. It will go through another cycle. There will be a downturn and clients are really anxious to see how their long-term forecast fits into that. A lot of providers have very sophisticated financial-planning capabilities that clients can do themselves. I wonder if many of them will do that. There will always be a segment that does, but a sizeable portion will not want to go through the trouble of putting all their account information into these aggregators and see everything there.
They are looking for simple and easy solutions, so I look forward to providers continuing to find ways to make it even easier for clients and advisors to have their outside accounts and other assets in a single aggregated platform, while also maintaining the security of the client’s information.
There’s still going to be a trend of advisors managing the entire book of assets for clients. That’s what everybody wants to do. I’m trying to do that when clients have IRAs with different providers, 401k plans, etc. That is very challenging and providers that can figure out how to do that in a seamless fashion are the ones that are going to prevail.
“None of these robo-advisors, or few of them, have gone through a full market cycle … I want to see how these advisors do through market turmoil.”
Q: This term “robo-advisor” is used very broadly. What do you think a robo-advisor is, and what kinds of features should this technology have?
Patrick: We see a robo-advisor as having the following capabilities:
- onboard, maintain, and manage a client’s assets;
- report on those assets electronically, with as little human intervention as possible;
- conduct automated rebalancing, tax-loss harvesting, and monitoring for wash sale conflicts;
- enable clients to open a variety of account types—not just individual taxable accounts, but IRAs and trusts, and handle other, more complex, situations;
- enable clients to maintain those accounts online—update their address, change their email, add additional assets to the accounts, withdraw assets—all electronically;
- manage those assets through model portfolios that the advisor can periodically update.
The types of securities available should be very broad. They should not be limited to ETFs and mutual funds. Individual securities should be allowed in the model, and clients should be able to do some basic reporting on performance according to their interests, but also on what their financial goals are in comparison to benchmarks and long-term aims. That’s how we’re looking at robo platforms.
Q: Some companies claim they have a B2C solution that is totally automated, with no human interaction at all. Do you think there is a possibility that robo-advisors will totally replace humans in this process?
Patrick: Technology is always surprising me in terms of what it is able to do and accomplish. But barring some unforeseen technological development, I do not see it entirely replacing human advisors. I say that for a few reasons.
First, people like interacting with other people. It’s nice to be able to open an account and do electronic reporting digitally, but when something goes wrong people generally want to talk to another person. None of these robo-advisors, or few of them, have gone through a full market cycle. The last eight years plus have seen a “bull market.” There have been some dips but generally they have quickly recovered. I want to see how these advisors do through market turmoil.
We’ve already seen at least one platform that has turned off trading, and that may have been the right decision to make. But in a firm like ours, if someone had turned off our trading capability based on their own discretion that would have caused us a great deal of concern.
We own the client and the relationship and we need to be able to provide them with the service they want. We can’t have things turned off at the moment we most need them. I do think there will still be people that want the human interaction. We haven’t gone through a full cycle of investment performance to see how people react and how robo-advisors react when there is turmoil in the marketplace.
Second, human life situations can be very complex. We observe HNWI that have, in some cases, very complex account structures where they could have 5 to 10 accounts and want each account managed jointly, all as one relationship, but each account has very different holdings in it that you can’t necessarily tie to a model.
Maybe there is a tool out there already, or maybe one is in development. I’m not aware of one right now that allows for easy model management when you’ve got 10 accounts, all with different holdings, all with different tax considerations, and low-cost basis holdings or clients saying “I’ve held this stock for/it’s been in my family for 50 years; I don’t want to sell it.”
You just have these complex situations that make it very difficult to automate. Those company situations will still stand out to me as people needing human advice. Can the robos service the affluent market, those with simpler investment needs that don’t need to be holding a lot of individual securities and will be fine doing ETF? Sure, and they’ll do a great job and the tech-savvy clients and users will continue to use Betterment and Personal Capital and similar companies. But there will always be some segment of the population that is going to want the human touch.
Is there enough of advisors to service clients for all the IRAs that are out there? That will be a good test for our industry, making sure we continue to provide the value-added services to those clients, and if we’re not they’re going to go with the robo. It’s good competition for us.
“We’ve had situations where a client had said that he was ready for some risk. Then there’s a market downturn and the client’s calling us and expressing concern.”
Q: Different generations use technology in slightly different ways. How does the older generation differ in its use of wealth-management solutions compared to millennials?
Patrick: I generally do not like to generalize across generational groups like this. Everybody is different. What we’ve seen in our firm is not a whole lot of differentiation by those groups. It’s been individual preferences. We’ve seen certain people that are older asking for more automated solutions. We’ve seen younger people that are totally fine using more paper-based solutions, primarily because their situation is more complicated.
What we as wealth managers need is to have both capabilities—to be able to offer digital solutions to those who are interested in them, and more paper-based solutions or handholding for those individuals who need them for those more complex situations.
Certainly there is a different level of comfort with the younger generation, who are used to using their smartphones; they’re used to being on the Internet, sharing information. We have occasionally found them to be less cautious when it comes to privacy concerns. It’s the older generation that is more concerned about digital because of the privacy concerns. There is risk in putting your information on a digital platform no matter what security the company puts in place; everybody is at risk. We’ve seen that across this industry and other industries, where hacks have occurred. So for us it hasn’t been a huge generational difference.
Q: Many financial advisors and also robo-advisor solutions use questionnaires to identify the risk tolerance for the client and predefine the asset-allocation strategy that will be offered to them. Do you think using such questionnaires is sufficient?
Patrick: We run custom portfolios for most of our clients and we generally want to interact with the client, especially HNWIs, on their risk tolerance. We are not big believers in algorithms. Maybe it’s because we’re old fashioned but there’s something to be said for getting information this way.
Some of these questionnaires are good and it is good to get some baseline information from clients on how they respond to different situations and what their risk tolerance is. It’s very easy for clients to fill these out when the markets are doing fine. It’s a much different situation when there’s market turmoil. That’s when you really find out what people’s answers are.
Filling out a survey is one thing, but actually going through the experience of a live event and seeing how clients respond is very important to us, and having human interaction in person is best because then you can see their nonverbal communication to understand what they are really saying, to have a full appreciation for what their tolerance is.
We’ve had situations where a client had said, “I want to be all stock because I’m not going to retire for 30 years so I’m able to face some risk.” Then there’s a market downturn and the client’s calling us and expressing concern. So there are good experiences for a client to go through. It’s better to do it earlier and we have the conversation and make sure that we allocate portfolios appropriately.
You can’t do that if you’re going to market this to the mass affluence segment. It’s tough to have a one-on-one conversation with every single person. We recognize that there needs to be some automation of this, and using an algorithm is one way to do that. We just want to be sure that when clients are filling out these questionnaires, it’s for a portion of their assets only; they’re not trying to put at risk their entire portfolio based on completing a 10-question survey.
There is a place for algorithms. But I have concerns about people placing too much faith in them. Not knowing what they’re doing, how they operate, and not knowing the client’s more complete picture of their tolerance exposes both the client and the firm to a lot of risk.
Q: Do you use any kind of software for rebalancing clients’ portfolios, or even restructuring them? Do you use any kind of automation in this process or do you mostly do this manually, by analyzing their needs and so on?
Patrick: It is mostly manual right now, and that is why we are talking to these B2B robo-advisors, to understand their capabilities. We know some clients may not need as tailored an investment solution as what we offer, and maybe have smaller accounts. We could allow those clients to take advantage of our investment capabilities and our impact investing approach without requiring a full financial plan or detailed investment policy statements and really sophisticated account structures.
We are looking at those tools and we think there’s opportunity there. Some of the tools that we’ve seen appear to be very good at that. But we are not currently using any.
“Every robo-advisor platform I’ve seen meets at least some of our requirements. Some of them meet more than others. We have not found one that meets all of them.”
Q: When you talk to different technology providers, what major features or capabilities are you looking for in software solutions as a financial advisor company?
Patrick: We are in talks with a prospect that wants to be able to refer its clients to us for investment-management purposes. We need to be able to make it very easy for clients to sign up and open an account. We should be able to send them a link in an email or point them to a website where they can fill out all the paperwork necessary to engage us as their investment advisor, open an account with a custodian, and select a model on the platform. Nothing to print off, no checks to write, no separate system to submit a wire transfer request. It’s all on that one site.
It should use some algorithm to slot them into a model that we would then have out there and manage that. That provides us with the ability to pick what we believe to be appropriate investments that follow the values of our prospects and ourselves, and be able to manage that model with very little intervention from our portfolio managers. We want the client to be able to get all the documents and reporting through a single portal. We want to send the required regulatory documents. We want all that to be delivered to a document vault that’s available on the portal.
At the same time, we want the client to be able to have some interaction with us; that would ideally be through the portal but also through other means, such as by calling our client service team. We have to be able to manage accounts, to keep an eye on them and offer the handholding where necessary for particular clients. That’s what we’re looking for in a solution.
Every platform I’ve seen meets at least some of our requirements. Some of them meet more than others. We have not found one that meets all of them. They are either under development or are not planning on adding this functionality, or they’re waiting on a custodian to complete some work. It seems like we’re still in the early stages of developing these capabilities, which we appreciate. We are likely going to have to do some combination of a platform, a third-party platform that we license in addition to some process where we need to go in house to make sure we can support it.
Q: Do you prefer to build additional features in house, or discuss them with solution providers so that they can develop them as custom features for you, or can speed up development?
Patrick: It’s unlikely to be custom development. It would be third-party tools. Some of these platforms are very good in terms of the fact that they have all the functionality on a single platform. The other approach we could take is to build the robo capabilities ourselves by cobbling together a third-party solution ourselves. The trade-off we face is do we try to build this, put it all together ourselves using dedicated solutions for specific functions or do we get a consolidated platform that does all that for us?
Where we’re going to end up is somewhere in the middle. We are going to get a platform that does 80% of what we need it to do and then we will get dedicated third-party tools to fill in where we think there are gaps or holes, or where our needs aren’t met, at least for now. That’s my hunch as to where we’ll land, and that will give robo-advisors more time to build their capabilities. They face a bit of a challenge because there are some big players out there and they’re going to continue to push into the space.
It’s going to be interesting to see how these small robo-platforms, which are very good, are going to survive on their own. Are they going to get bought up by bigger players? What will happen to them after that? It’s a very interesting time to be working in this space; I have my concerns about the longevity of some of these firms but they’re all doing very interesting work that, if it doesn’t live on with them, it will live on with somebody else.
“It will be interesting to see how some of these robo-platforms do when the older generation using them passes away. Is the younger generation going to stick with robo-platforms, or are they just going to move their assets somewhere else?”
Q: Analysts say that in 5 to 10 years we will observe significant wealth transfer from the Greatest Generation and Baby Boomers to their children and grandchildren. What does this mean for the industry, and what challenges will we face from the technology point of view?
Patrick: From a business standpoint what we’re trying to do is to maintain relationships with multiple generations in the family. A longstanding relationship is likely with the oldest generation; at the same time, we’re trying to reach out and connect with the younger generation, their children and even grandchildren, to make sure they know who we are, that we’re available to them if they have any questions or concerns, and trying to make their life events as seamless as possible.
The more we can convert to electronic document signing, the better. That’s one of the biggest challenges—all the paperwork that has to be prepared every time you do a wealth transfer. That is where you usually run into problems. For some folks, having ongoing relationships with both spouses and with multiple generations makes that process easier. If people know who you are, that makes them more likely to stay with you.
It will be interesting to see how some of these robo-platforms do when the older generation using them passes away. Is the younger generation going to stick with robo-platforms, or are they just going to move their assets somewhere else? That’s where the human interaction is going to be very important because it’s going to be difficult for robo-platforms to have a relationship with multiple levels of the same family. Maybe they can figure out a way to do it and that’s why they’re hiring advisors now; that will be key in handling the wealth transfer that’s going to be happening over the coming years.
Q: As you speak to providers of robo-advisory solutions, given that you’re more on the financial side do you see a gap of understanding between software people and financial experts? What knowledge should software developers have about capital markets in order to innovate further and provide solutions that will help wealth-management companies? How and what should they learn, and what topics they should focus on?
Patrick: I would suggest spending more time talking to two different groups of people:
- Talk to the advisors, the asset managers, the investment professionals. That’s one group; the people who are making the asset-allocation decisions, making the trading decisions. What are their thought processes in making those decisions? It’s necessary to get as many use cases out of those individuals as possible just to understand the different types of situations they may face with clients, to see how technology might aid in servicing those clients and providing investment and wealth-management services.
- Talk to the operations people, the middle office people. The ones dealing with opening accounts, maintaining those accounts, closing them, providing accounting and reporting. Understand all the different challenges that these individuals face on a day-to-day basis in providing information to clients.
When there are problems, the operation side becomes the main focus. Just make sure you have an appreciation of all the different steps that are in the value chain of servicing a client. What they are going to look for in terms of capabilities, because it’s the operation scene that generally has to fill the commitments that the investment and financial advisors provide to their clients. They’re the ones that will be looking at these platforms with a very skeptical eye, trying to make sure that it can do all the things it purports to do because there’re just so many different nuances that go into servicing clients.
Q: Which of the wealth technology companies that you’ve seen would you highlight as innovators in the industry, and why do you think they are innovators in this area?
Patrick: I’ve talked to various providers. I’ve been impressed with what Schwab is doing with the robo-platform that they’re offering to their advisors. There are things they need to continue to work on and capabilities they need to add, but they’ve created a very solid solution and I’m impressed because they’re a large company and it’s not usual to see products like that coming out of larger companies.
Pershing has done a good job of taking a different path; instead of building the robo-platform on its own it has partnered with other firms, like AdvisorEngine, Marstone, and Jemstep, to work with them and let them be leaders in the development of robo-platforms. It’s nice to have another option, so they’ve partnered on that one. I like AdvisorEngine. I would say that they are the one that we have liked most so far in terms of its flexibility to handle a bunch of different situations, and its functionality.
I also like what I’m seeing from Orion and Envestnet in terms of an open architecture, which allows people to use a lot of different platforms because it’s hard to be a one-stop shop.
Every wealth manager operates differently. We offer custom solutions to our clients. We’re stock pickers. Finding simple rebalancing tools does not work for us; we need more complex capabilities and need to know that we then tap that into a platform that these two providers have.
It’s very good that Envestnet and Orion have taken different approaches, but Envestnet, even though it has built a lot of the capabilities in house, still allows you to use another CRM system or another trade application, which is a really nice way of doing it.
The open architecture is a big innovation and it does not tie any wealth advisory firm into a particular solution. It should be easy to move away from a solution if you choose to do so.
Q: Could you share your vision of the future development of the wealth-management industry? What will a typical company in this niche look like in five years or so?
Patrick: It’s going to go into a path that’s similar to what we’ve seen in other industries, with there being larger companies and boutiques and not much in the middle:
- The larger firms are very good at having effective and efficient processes for clients. They will be a great stopping point for a large client set.
- There’s going to be a lot of boutiques that are for clients that maybe have more specialized needs, like impact investing, or just for working with small firms that want a more personal touch.
- There’s going to be a bifurcation there. Those in the middle are going to be too small to be really efficient and too big to provide the niche focus that people are going to be interested in.
I expect to see more acquisitions by these larger firms as they swallow up firms that have not conducted good decision planning, don’t know where they want to go, but need to monetize their assets. As for the rest of us, who are on the boutique side, we will continue to focus on our niche and we’ll serve our clients as best we can.
Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also author of the WealthTech Club blog, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.