Integration, Schwab-style

Technology continues to be a key driver in the investment management industry, with increasing convergence and blurring of the line between different firms’ offerings. Last Thursday, February 21, Schwab and Envestnet announced that Envestnet Tamarac is purchasing Schwab’s PortfolioCenter, a portfolio management and reporting application. Envestnet Tamarac, which uses PortfolioCenter as its primary portfolio management system and data source, looks to benefit from this acquisition in a number of ways, not least of which is eliminating the licensing fee it must currently pay to Schwab to use the software. In addition, this also gives Envestnet access to approximately 2,000 advisors that utilize PortfolioCenter directly through Schwab, providing an opportunity to market its other products to them. In an article on Financial Planning’s website, Andina Anderson, Executive Managing Director at Envestnet Tamarac, said this represents a significant opportunity to reach the smaller end of the advisor market.   

Sidestep for Schwab?

For Schwab, the story is a little more complicated. Until fairly recently, Schwab was focusing on developing multi-custodial portfolio management tools. This deal continues to signal Schwab’s move away from that based on the evolution of advisor preference for a custodian that allows them to select and integrate in whatever tools and technology they want from a wide array of providers. 

Back to Basics

On the portfolio management system side, Schwab Advisor Portfolio Connect™, “a simplified approach to portfolio management,” will become its core proprietary offering. Free to advisors who custody with Schwab, it is a “streamlined” tool directly integrated with Schwab’s custodial platform, so there is no need for daily downloads, integration or reconciliation, which can be a significant budget drag, especially for smaller advisors. Schwab continues to expand the capabilities of Portfolio Connect, and in 2019 will roll out a number of additional features, including support for Schwab’s Intelligent Portfolios.       

Owning the Dashboard

Schwab is also investing significantly in facilitating connections through the Schwab dashboard to a curated selection of investment and wealth management related applications. OpenView GateWay®, offered through Schwab’s Intelligent Technologies, provides single sign on (SSO) integration with a number of leading providers in aggregation, reporting, trading and rebalancing, financial planning, data analytics, etc. This enables Schwab to serve as the coordinator and consolidator, making it a much “stickier” relationship. 

Mission Possible?

In recent weeks an online neo-bank aptly named Aspiration launched a national TV ad campaign. The pitch is distinct and, we think, worthy of attention for the following reasons:

○ Unlike other financial institutions, even those that offer socially responsible products, Aspiration is a financial services firm whose core brand and value proposition is social responsibility. As its mission statement claims, “We didn’t set out to build a bank. We set out to build a better world.” Aspiration is “a new kind of financial partner that puts our customers and their conscience first”

○ In keeping with its mission, Aspiration allows its customers to determine how much they think is a fair fee to pay even if it is zero

○ Aspiration donates 10% of every dollar customers pay in fees to charity

○ Aspiration’s product set offers customers higher checking and savings rates than most banks, even online ones, as well as free ATM access “anywhere in the universe”

○ Aspiration also has two investment options available to both taxable and retirement accounts, a sustainable investing mutual fund and a low volatility mutual fund of funds, taking it beyond what most neo-banks currently offer

Aspiration’s messaging is clear, as is the apparent alignment of its goals and actions with those of its customers. The product set is simple, delivers on value, and reinforces its socially responsible agenda. For these reasons, we believe that Aspiration is a compelling offering and may be a model for alternative financial services firms going forward. 

Selling to Institutional Clients

1 Corporate Executive Board
2 Biznology
3 Gartner Group
4 Biznology
5 LinkedIn
6 CMO Council
7 LinkedIn

Logo Power

Zara is getting a lot of press for its new logo. If by some chance you haven’t seen the hailstorm of negative attention, you may want to Google it to see what all the hubbub is about. Or just search#zaralogo where you can find some truly funny and entertaining comments. We won’t join in on the Zara logo bashing, but now is a good time to discuss why companies change their logos in the first place.

Mergers and acquisitions

This one seems fairly obvious. If a company, in one way or another, joins another company, do they retain one name/logo and eliminate the other? Is one brand clearly the acquirer and/or does one brand have stronger brand equity? Often times, the merging of two or more firms creates the opportunity for a new name, resulting in the need for a new logo. The new entity hopefully offers something fresh and different to consumers, and a new name and logo are a great way to express that excitement.

The times, they are a changin’

For some companies, if their positioning strongly references and leverages their heritage and longevity, then the look of an old legacy logo is probably appropriate. Think John Deere, Coca-Cola and Johnson & Johnson, where their logos have been tweaked (the deer in the John Deere logo now leaps instead of landing, for instance), but essentially remain true to the original. General Electric is one of the oldest logos still in use, but, perhaps now is a good time for it to consider updating its logo to better express current business lines. Sherwin Williams’ logo has been in use for well over 100 years, and designers and branding specialists have been calling for a logo redesign for years. What some see as blood dripping over the earth hardly seems in line with all the elegant and inspiring sample projects they share. If a logo feels outdated and no longer represents the core mission of a company, then it’s time for a redo. 



Deciding to appeal to another market, such as high-net-worth or ultra-high-net-worth customers, may require an updated logo that appeals to that market or an altogether different name, logo and brand. Going up or down market has the potential of confusing a target audience and diluting the current brand, so a new logo and brand may be the right solution.

Moving Toward Market Dominance

Continuing to honor of the passing of index fund champion, Jack Bogle, we would like to point out the likelihood of an upcoming milestone. Sometime this year, or the beginning of 2020, investments in passive domestic equity mutual funds and ETFs will outstrip those in actively managed mutual funds for the first time ever.

The chart below tells the story. Twenty years ago, actively managed domestic equity funds hit $2.3 trillion in total assets, over 10 times the amount in passive. But as active funds suffered severe downturns in the market crashes of 2000 and 2008, assets in passive funds continued to grow fairly steadily. By November of last year, assets in domestic equity index products had pretty much closed the gap. 

In recent years, the spread in net new cash flows between passive and active has increased dramatically. If this trend continues, passive assets will move ahead in the next 12-15 months.

Perhaps more importantly, it does not appear that the relative growth advantage of passive is likely to end soon, suggesting that this type of investing will more securely establish itself as the core of the majority of investors’ portfolios.   

Jack Bogle’s Legacy

Much has been written this past week about Jack Bogle, who passed away on January 16, 2019, and his achievements. In addition to founding fund giant, Vanguard, he has been credited with practically inventing indexed mutual funds. A few years ago, Warren Buffett credited him with saving investors tens of billions of dollars over time.

This led to the question of how much Bogle may really have saved investors. According to our calculations, Mr. Buffett may have understated the amount significantly. According to Morningstar, net assets in index mutual funds as of November 2018 stood at just over $3.5 trillion, while balances of ETFs were about $2.1 trillion. Average costs for index mutual funds are about nine basis points. For ETFs, they are about 21 basis points. So the all-in costs are:

The difference in costs in one year alone ($44.34 – $7.68 billion) is more than $36 billion. Imagine how much this would have added up to over Bogle’s career!

This leaves out the question of performance, of course, but does prove that a significant portion of investors strongly believe in the index fund concept. This is in sharp contrast to when Jack Bogle launched the First Index Investment Trust (now the Vanguard S&P 500 Fund) in 1975, known at the time as “Bogle’s Folly.” Let’s take a moment to honor the memory of a true investment management visionary. 

The Callan Periodic Table Turns 20

Callan recently published its 20th Anniversary Edition of The Callan Periodic Table of Investment Returns. This chart has become ubiquitous as an illustration for the case for diversification and is widely used in marketing, particularly with individuals. The chart shows annual returns for an array of major asset classes, ranked from best performing for the year to worst performing. It was created by Jay Kloepfer, Executive Vice President and Director of Capital Markets Research at Callan Associates.

Every picture tells a story

The Callan Periodic Table communicates the risk of concentrating in one asset class and makes the case for diversification. “The enduring appeal of the table is its ability to be understood at a glance,” says Kloepfer. “And once you’ve seen and absorbed it, you can refer to it again and again. New insights still come to me even 20 years later!” As you look across the years and asset classes, which are color coded, it’s easy to see that the top performer one year typically reverts to the mean and is often one of the lower performing within a year or two. This holds true across asset classes, capitalizations and geography. Also clear is the wide range in absolute terms of what top and bottom performance means from year to year, with top returns ranging from 78.51% in 2009 (Emerging Market Equity) to 1.38% in 2015 (Large Cap Equity). Also compelling on the downside is the fact that the worst returns range from +4.33% in 2006 (U.S. Fixed Income) to -53.33% in 2008 (Emerging Markets Equity; note in both 2007 and 2009 it was the top performer).

Cash was king in 2018

Returns in 2018 were notable for a few reasons:

○ For the first time in the history of the table, Cash Equivalents was the best-performing asset class, returning 1.87%
○ This means, given the forecasted inflation rate range for 2018, investors essentially kept up with the cost of living
○ Except for U.S. Fixed Income, which had a return of 0.01%, essentially flat for the year, all other indices tracked in the chart had negative returns, which is the first time this has happened in the 20-year history of the chart

Given the potential for continued volatility in 2019, we anticipate the Callan Periodic Table will be a particularly useful and widely-used tool for advisors this year.

Tech Goes Front Office

We draw attention to the chart below, taken from the latest Financial Planning technology survey of financial advisors. The findings are indicative of the ongoing shift in the focus of advisors from tech as a back and middle office solution, to tech as a facilitator of the (increasingly digital) advisor-client relationship.

CRM, Financial Planning and Client Portal are top-used tools

Together, these three areas support the advisor in defining and delivering a richer and more meaningful client experience. 
• CRM takes the lead as the core operating system, coordinating, facilitating and informing advisor-client interactions. 
• Financial planning software helps determine clients’ needs, set the plan for delivery of the appropriate products and services, monitor and report on results. 
• The client portal gives the client a window into their financial condition while enabling an enhanced and ongoing digital interaction between the client and the advisor.

Fundamental shift to client interaction-focused tools

We expect the shift in focus to “front office” technologies to continue.
• CRM systems will be more deeply integrated with key information sources including portfolio management/aggregation systems and, on the client side, financial planning applications. 
• Financial planning applications will become more collaborative, including ways to gather and input data over time and more interactive, providing ongoing analysis and reporting on status changes, goal realization and other value-added information. 

Client portals will become more user-friendly, offering omni-platform access and more options for two-way advisor-client communications.

Another New Year and New Words of the Year

We couldn’t let the New Year ring in without a follow up to our previous words of the year (WOTY) post to let you know of Merriam-Webster and Cambridge Dictionary’s recently announced WOTY.

Liberty and JUSTICE for all

Merriam-Webster anointed “justice” as its 2018 word of the year. Varied in meaning and something we seek, the word was a top lookup on last year, up 74% compared to 2017. Merriam-Webster cites the year’s big news stories, centered around justice, as the driver. According to Merriam-Webster, “the concept of justice was at the center of many national debates in the past year: racial justice, social justice, criminal justice, economic justice” and used frequently during the Supreme Court Justice confirmation hearing in 2018.

My phone, my phone, where is my phone?

On the lighter side (maybe?!), Cambridge Dictionary’s People’s Word of 2018 is “nomophobia,” described as “the fear of being without or unable to use your mobile phone.” Dictionary blog readers, social media followers and fans chose the word from a shortlist selected by Cambridge Dictionary editors. Nomophobia is a blended word comprised of syllables from “no mobile phone phobia.” Although not a truly scientific phobia, we’ve all witnessed it first-hand. The word originated in a 2008 UK Post Office report, then made its way into the UK media and has since gone global.

Words are powerful tools that can reflect the times ─ and these two new WOTY are no exception.

Relax with the Pantone Color of the Year

As you may or may not already know, the Pantone Color of the Year is Living Coral. According to the Pantone Color Institute, the color was chosen because it is “vibrant yet mellow…Living Coral embraces us with warmth and nourishment to provide comfort and buoyancy in our continually shifting environment.” The color really is relaxing, friendly and pleasant. As they say, a picture is worth a thousand words, so sit back, take a minute out of your day and immerse yourself in Living Coral. Enjoy!