From Static to Dynamic: The Evolution of Digitization in Wealth Management

[00:00:00.610] – Alex Serman

Alright, welcome to this month episode of Whiskey and WealthTech. I’m your host Alex Serman, the Managing Director of Wealth here at First Rate. Joining me. I’ve got Emil Polito. Emil, thanks for joining us this month. Why don’t you go ahead and introduce yourself.

[00:00:16.690] – Emil Polito

First of all, thank you for having have me, Alex. I am an industry financial services executive who is frightened to say I have over 40 years of experience in all aspects of financial services. Starting from Paine Webber, which I spent the lion share of my career in mutual funds and asset management. I then worked for Citigroup where I was responsible for building out their WealthTech platform to service a full outsource of money managers and all types of distribution. From there I decided to get entrepreneurial and started my own asset management firm. And a little funny story on that one, we started it in 2008 while the world was collapsing. I was finally becoming an entrepreneur and realized what it was going to take to be a successful entrepreneur. So I did that and then wind up selling my business, got bored, became a janitor. If my wife saw me, I was a janitor. And if my kids knew I were home, I was a golfer. So I didn’t like being a golfer and a janitor. So I said I’d better do something else. And that’s when I got involved with getting on advisory boards and independent directors of firms which I believe are in the right place and had products that I stood behind and believed in. And that’s what I’ve been doing now for believe it or not, the last five or six years. So I think that’s about a good sum up of my background and look forward to having this conversation.

[00:02:16.610] – Alex Serman

Awesome, thanks Emil for that. Appreciate all that background. So yes, it does sound like you have quite a wealth of experience that you can share with people. So since this is Whiskey and WealthTech, we’ll talk a little bit about some whiskey here. So doing a little bit different today we’ve got our Whiskey Del Bac Classic. And so this is a really good American single mall out of Tucson, Arizona. So it’s right in the middle of the Sonoran Desert. So that really changes up kind of the flavor of the whiskey. I would say your very classic single malt. So if you’re used to drinking a scotch or drinking Irish single malt, like this will be kind of similar, but it’s got a little bit of a kick and spiciness to it from being in such a different kind of environment. It’s really good. I’ve been to the distillery, they were fantastic. Really nice people. Very hard to find the front door though, so I would say to them if they’re watching, put a few more signs out. And then Emil, so you’re not a big whiskey drinker, but you’re having a cigar. So tell us a little bit about the cigar you’re having to enjoy the podcast with.

[00:03:33.640] – Emil Polito

Yeah, in fairness, in full disclosure, I love my good cigar. So I am sitting on my farm, and when Alex told me the whiskey, I padded up for what I thought would be a good cigar to go along with what that would be for all of you out there, I am smoking a Liga Privada. It’s called Jewish State makes it, and it’s called a Dirty Rat. But it is a cigar that starts off a little bit spicy, but as you bring it down, it really smooths out. And it’s a hell of a cigar to go with a single malt. And I’ll enjoy my cigar while you have a good couple of sips of your whiskey, and I’ll be just as happy as you are smoking it. Smoking my cigars you’re drinking, Alex, I think we’re on even foot.

[00:04:34.990] – Alex Serman

So, now the topic we’ll be talking about today is really the digitization of wealth management. So there’s this huge trend in firms wanting to become more digitized, clients wanting to be more involved with their data, be more digitized. And so that’s really a struggle that firms are going through at the moment, trying to figure out how to best do that efficiently with cost effectiveness.

How are firms really reacting to these trends? So kind of what are they looking at? What are they seeing? What’s driving them right now?

[00:05:12.640] – Emil Polito

I think what’s amazing, Alex, is watching this industry from the time when we used to when I joined Paine Webber, it was we got our first computer and we were department of about 700 people. We had one Mac computer and we all stared at it like it was a monolith. And we were saying, oh my God, what do we do with this thing? What do we do with this thing? So obviously the people who got familiar with how to automate and use computers had a very big advantage over everyone else who did. And there was a lot of resistance in the early days. But we came from a world where it was just manual and static. I would call it manual and static. And it was hard enough for us to get the operations flows of getting trades settled, comparing them with the brokers that we did it. Reconciling, generating returns that we could stand behind and then given them a static report that had transactions and positions and some level very, very early, very little information about the portfolios and we couldn’t do that very well. Right. And even in today’s world where we’re talking about digitalization, it’s really turned into kind of we’re being pushed into it by the robo advisors and young men like yourself who really want to see portfolios the way they want to see them. Not only do they want to see it the way they want to see it, they want to really get something private. So it’s no longer, we’re going to give you a model and then we got 10,000 clients and all 10,000 clients are going to get the same securities and the same look and feel. So that has put a lot of pressure on the process. But what it also did is created a whole industry of this WealthTech.

WealthTech companies were smart enough to realize that the world is going into best of breed. So an accounting firm could do accounting well. A settlement system could do settlement well, right? How do we integrate them efficiently, seamlessly, and create a record that we could all stand by? And once we have that right, how do we make it look and smell and feel just the way the client wants it to be? So I think that’s the whole game and that’s what all of these WealthTech firms are chasing. And that’s what a lot of the big firms are starting to figure out. That small is small is big because it’s taking the best of Breed approach, right? We do certain things good if other people do certain things good and we can come together, that’s the only way we’re going to be able to digitalize to create the private and customized environment that our clients are demanding.

An example of that, Alex, would be when we tried to get a little more sophisticated, we all had a big project and I used to call it the end of project data warehouse. We all tried to do it ourselves. And data warehouse just meant we were going to spend millions of dollars and never get successful. Never be successful.

[00:09:00.410] – Alex Serman

And so you kind of talked about the strategy of how firms are changing. But is this changing their value proposition? Because I mean in the light of the way that we’re moving towards digitization and how we’re moving towards that with best of breed kind of vendors and other technology platforms, our banks, wealth trust firms, are they feeling like their value proposition now has to change because of that? And so then their competitive advantages, what are they feeling like? Are they still in their DNA same kind of firms? Or are they going to really have to fundamentally change to address these kinds of things.

[00:09:47.440] – Emil Polito

Trying to fundamentally change because now everything is designed to be client facing. So everything they do now becomes “how do I make the user experience of my clients the most important thing that I do.” It’s no longer making sure that I collect on sales. It’s no longer all the stuff that used to be important right and all the stuff that had risk associated with it is a given that that could be done and we spent a lot of time automating that so we can reconcile right? We can settle and settlement cycles are shortened right. Where we haven’t spent the most money was on the user experience so we protected the risk of the brokerage firm of the company right? And now we’re saying, okay, if we want to compete and we really want to get our client experience to be a reason for why they will select us as opposed to somebody else, it’s going to be all about me creating a portfolio that’s private and that’s customizable, that they could see it and sort it the way they want you to.

[00:11:11.250] – Alex Serman

The priority for these firms are client facing technology. The users experience, how they’re now interacting with these firms and how that’s changing. So in your opinion what are the kinds of platforms, the kinds of technologies that the users are wanting to see? Is this performance? Is it trading and rebalancing? Is it optimization? What is most important to them and what kind of technologies are these firms investing in to support that I guess changed trends and how the clients want to see their information.

[00:11:53.210] – Emil Polito

I think the two biggest trends out there right now you’re going to hear the word direct in this direct indexing so generally that’s kind of an example of if you want to buy an index fund just by the next fund and hold it for a long time right? I think direct indexing just means that clients can actually get an index that they want to create, optimize it right and put potentially an over of an ESG. So again I think that it’s the technology that could scale to provide the personal touch. We call them direct indexing but they’re really personal portfolios. It’s really creating a portfolio that’s specific to a client. That technology is hot and it needs to scale for a large amount of clients. And then I think the ESG socially, environmentally, and governance plays into that, because you need to be able to have the clients who have preferences on different types of companies that they’re willing to buy is an added complication to that. And then putting guardrails on those investments so the clients are protected is really hot dots and I think that those are two really big drivers of a lot of the fintech area.

I think another one is one that you guys are doing which is the client. We haven’t really changed the look and feel of client reports. We do a lot of attribution we can tell hey here’s why your performance returns the return against an index. But we haven’t really been able to say based on your parameters and based on the way your portfolio is trending, this is something you might want to look at. And that’s kind of what I would call the next generation report, which brings AI into the mix. I think that’s a big one. So those kind of tools and also the RegTech space is big because compliance always is going to play a role in keeping when you give too much customization away, right, the compliance people get nervous. So the RegTech component of the protection that the firm needs so that if they choose to get an advisor, an advisor usually would have a specific discipline. And that discipline generally leads to a certain type of return if something falls out, really, really out of tolerance. We need to act quickly to really look at it and ask the questions. But I would think those are four big examples of different types of wealth tech products that are really having a lot of successes.

And then the last one, Alex, would be maybe it’s not for this conversation, is how do we as an industry give access to suppliers who may want to get a little bit of digital currency or digital assets. And you see a lot of wealth companies getting into the game to try to add digital assets, both currencies tokens, the whole tokenization of companies and stocks and DeFi and you name it. That’s a game that a lot of people are doing, a lot of R & D. But again, those will be companies that will figure out how to do it right. They’ll figure out how to settle, they’ll figure out how to do all that stuff, and then they’ll figure out, how do we make this look the way the client wants to see it? And that’s the whole game. I think the client facing aspect of going from static to dynamic is the whole game and that’s kind of what I see going on in a lot of venture capital and private equity along the way and what customers and what firms are looking about. Alex, awesome.

[00:16:40.890] – Alex Serman

Thank you, Emil, for joining me. It was wonderful to get to chat with you and hear some really interesting stuff about what clients want, what firms are doing to address those needs and wants and how the industry is changing. And five years from now, who knows, we could be everything driven by AI. Clients could go in and have all of the customization that they could possibly want or it could all be completely shut down by compliance. I know crypto and other kind of digital assets, people are wondering what in the world is going on with those and we’ll continue to see how that shapes out. But I think the trend of clients wanting more information when they want it and their advisors needing to be able to get that to them, as well as being better at forecasting and explaining to them, hey, here’s what we think you should be doing in the future. And not just following an index like you mentioned, but really personalizing that to each of their clients and doing that in a scalable and automated way. I think it’s going to be extremely key to their success in that. But yeah.

Emil. Again, thank you for joining us on Whiskey and Wealth Tech. It was wonderful having you and getting your insight into digitization of wealth management.

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