Creating a Frictionless Wealth Management Experience with Stephen C. Daffron of BetaNXT

Shannon Rosic, director of WealthStack Content and Solutions, speaks with Stephen C. Daffron, CEO of BetaNXT, on creating a “frictionless” wealth management experience and what it means for advisors, financial services, and the wealthtech firms who serve them.

Shannon Rosic

Welcome to the WealthStack Podcast. I’m your host, Shannon Rosic, the Director of WealthStack Content and Solutions. In this episode, I’m joined by Stephen Daffron, CEO of BetaNXT, a newer player in the wealth tech space that is championing the next wave in wealth management technology and outsourcing solutions. For today’s topic, it’s all about creating a frictionless wealth management experience and what it means for advisors, financial services, and wealth tech firms that serve them. Stephen, absolute pleasure to be speaking with you today.

Stephen Daffron

So nice to meet you. Thanks for having me.

Shannon

Of course. And so, before we dive into our first segment, if you wouldn’t mind, could you just share a high level background on yourself and just a quick overview of BetaNXT and why now is the right time to enter the marketplace?

Stephen

Okay, well, I’ve been in this marketplace for a long time; several decades. I’ve been in the PE space for the last several, where I ran private equity across a number of different perspectives right now with Motive Partners (which I founded with a couple of partners seven years ago). Before that, I was with Warburg Pincus and Silver Lake running and buying and selling companies, primarily in the data space. The one that you’d recognize would be called Interactive Data, which was the largest fixed income provider of data. Before that, I was head of tech, data and ops at a firm called Morgan Stanley. Before that, I was in the hedge fund space working for Jim Simons at Renaissance Tech. Before that, I was at Goldman Sachs. Before that, I was an entrepreneur where I actually built and sold my own software to Wall Street. Before that, I was an academic. I was actually professor of economics. And before that, I was a soldier.

So I’ve been around a long time and BetaNXT is actually the product of something we’ve been looking at for, I guess, I looked at it first back in 2014. Why? Well, because it was a malnourished firm in a growing marketplace where the marketplace was going in one direction and this firm was going in a different direction. So now is the time to get into it. Why? Well, because from 2014 to 2019, as the marketplace grew, Beta didn’t. It was actually a part of a much larger firm called London Stock Exchange Group. So we looked at it from a private equity perspective; purchased it, then started looking at it seriously in the Fall of 2021, then purchased it and closed on it in July of 2022. We did so because the marketplace itself is going in the opposite direction of where Beta was going: it’s growing, it’s demanding. The demand curve was growing at a very fast pace and growing from the perspective of needing more and better data science and more and better technology. So we thought it was the right time to get in.

Shannon

Well, that makes sense. I think we could do a whole separate podcast just on your background, but it sounds very interesting. You’ve lived multiple lifetimes, but I do want to get into our first segment. So you know what’s coming, it’s “Stats All, Folks”. And the first stat I want to throw out is McKinsey estimated in 2022 that advisors spend 60% to 70% of their time on non-advisory tasks, sighting ‘lack of a unified platform’ and a ‘high degree of manual data processing’ as among the top obstacles. For an advisor to only spend 30%, maybe 40% of their time actually working with clients, that seems quite alarming.

Stephen

Well, it’s something called technical debt. So the wealth management space in particular – really since the recession of 2008 – had not spent the time and the effort to keep up with where the marketplace needed to go. So instead of fixing it, they would layer on halfway fixes. As my mother used to say, “There’s never a time to do it right, but there’s always time to do it over.” And that’s what we’re doing now, we’re actually doing a lot of this over because the technical debt became too great. This function of layering legacy systems on top of legacy systems from: just think back a few years, 12 or 13 years ago, this was all mainframe daily, monthly back cycles. They didn’t move to distributor systems, but they were the older distributor systems. The rest of the capital markets had gone ahead of them by a decade. And then only in the recent years – really in the last four, call it five years now – is the wealth market space that needs the help, those advisors who need the help getting caught up with the kind of data structures, the kind of technology that allows them to do things in near real time. This effect is having […] well, the advisors call it “going swivel chair”, where they have to sit in a chair and swivel from side to side, and double key in data, and do things three and four times, instead of having the kind of transactions that allow them to pay attention to their client. They deal with errors, they deal with broken trades and they deal with reconciliations all day.

Now that an advisor spends only 30 to 40% of their time actually working with clients is exactly why the major leaders of these wealth management firms are saying, “We want you to help us get out of this. We want you talking to BetaNXT.” And I’ve talked to the CEOs, if there are major self-clearing firms in the wealth management space, I’ve talked to all them in the last year since we acquired BetaNXT. We, and they, had reached the same conclusion, which is we need to do what we should do to pay attention to that advisor experience, to give that advisor the chance to be able to pay not 30% of his time with the client, but 90% of his time with the client.

How do we do that? Well, by paying that technical debt down, by making the data structures coherent. The data, when the client touches it, is perfect. When it goes all the way down to the processing flow, we manage to break it and then have to reconcile it multiple times. By having the processing flow that has a data structure that’s A.) coherent, and B.) works in real time, you solve that problem. So we are focused in BetaNXT and all the components of BetaNXT in making that advisor, and that advisor experience, be more complete.

Shannon

Well, I’m absolutely stealing that term of “technical debt”, so thank you for sharing that. So I did want to throw out one more stat to you though, because I came across – I thought this was very interesting – it was: research from Cerulli recently found an overwhelming 94% majority of practice management professionals agree that limited technology integration brings about productivity challenges, which obviously seems very detrimental to a firm that’s ultimately trying to grow.

Stephen

Yeah, I mean, I’ve talked to two CEOs in particular who have referred to this and one was Charlie Scharf, who’s the CEO of Wells Fargo, and the other was Tim Buckley of Vanguard. Both of them talked about this. They talked about the fact that the limited technology integration is because, in the past, many of these wealth management firms would think to spend on the technology from the trade blotter up. Your trade blotters are what used to be on the trading desk when the trader wrote on it and threw it over shoulder. That’s the trade blotter.

Spending money on the trade blotter up did not solve the problem because to practice management professionals, technology integration has to be from the entire column, from the time the client touches it, until it goes down to the books and records. I’ll give you an example: Money is made when the advisor can focus on the client, what we talked about before. And the pioneers of this space, people like John Bogle – Jack Bogle, if you’ve ever… I’m sure you’ve seen him, the originator of the Vanguard – talks about what you had to do to make it work from that trade blotter up. But what makes the processes work front-to-back is being able to take the same data and have new products. For example, you have a product of trades; it has to have a cost basis. So having a product […] where the advisor can talk about it to the client, but that you can’t actually understand or record the cost basis when the transaction happens? You just created a reconciliation break. Now, that cost basis then gets used for tax scoring. That tax scoring gets used to do tax optimized trading. If you don’t do this from the top down, if you don’t have the technology integration, then you wind up not just causing your problem but causing that problem to be repeated time and time again.

Shannon

And the ultimate objective to create an end-to-end holistic wealth management experience seems simple in theory, but why has it been such a challenge for the wealth management industry to ultimately execute on this?

Stephen

It’s hard to take something, it’s hard to paint the plane while you’re flying it. Because we are constantly having to do this every day. There are 50 million investors every day who want to turn on their screens and talk to their advisors; they can’t do that unless BetaNXT performs every day. And it is, we do 37 million transactions a day and every one of those investors can talk with their client and get the data they need from BetaNXT to make it work. However, to actually make the kind of changes that you need to do to have an end-to-end, front to back view, you have to get all the component pieces to work together. That’s working, we’re making that effort, but part of it comes by we’re willing to put capital into it to actually make down payments on that technical debt.

The second is you have to get cooperation […] So for example: from the client portal – from a firm like InvestCloud – to a middle office firm like Tegra118, to a firm like BetaNXT, down to the creators of the products themselves; unless you have those kind of cooperative partnerships that work together, that actually see themselves as being supportive of that entire process, then you can’t get that data architecture to be front to back. Now, is it moving in the right direction? Yes. Part of that comes from technology itself, because cloud has made that much, so much more possible. But also, it comes from being pushed by the clients.

We’re not dealing with the people whose investment horizon was made up by mutual funds. We’re now dealing with a wave of children, who are at the age where they want to see…not only do they understand the tax ramifications of dealing just in mutual funds, but they want to see what the more sophisticated products look like. And candidly, it’s because we want to have those people get access to those kind of the products that actually can move them from where they are to where they want to be. That’s what makes it possible for us to push the wealth management industry in that direction.

Shannon

And it’s interesting because a big pain point I’m constantly hearing from advisors utilizing these disparate systems quite often, and I always say advisors probably have the source next in the industry between the “swivel chair effect”, the big challenge is the data behind everything. If one thing is entered slightly differently in a different system, they don’t talk to each other. So I know we promised listeners we would talk about creating a frictionless wealth management experience. What does that ultimately mean? And what should the enhanced wealth advisor experience look like from a technology perspective?

Stephen

Well, think about this as the same way you think about when you get in your car. You get in your car, you turn the key, you expect the engine to start, you expect the shift in gear, and you expect to drive way down the road and not have to know everything that happens behind the steering wheel (the steering wheel attaching to the axles and how it turns…). You expect that to happen. We have to have the same kind of demands for our wealth management system to make it frictionless. Just like you expect your car to operate on the road – not driverless, because you’re driving it – you’re making the directions, and the investor and the advisors should be able to make the directions, but you expect all the component pieces to work together from that point forward. To do that, you start with the demand curve.

You, the investor; you, the advisor; and you, the owner of the broker dealer relationship, say, “We expect this to happen.” And that technology that we expect to have happen can’t be based on what you’ve done in past years. It can’t be based on batch cycles that were done daily or even weekly. It has to be done on an API basis that gives us the data we need. A good example, again, is a corporate event. A stock has a split. When that stock split happens, the advisor needs to be able to see it then, needs to be able to talk to the client about it then, be able to understand the alternatives for the client, which is all data structures. Having that data be able to be visible, what does it mean in terms of the portfolio? What does it mean in terms of the cost basis?

What does it mean in terms of the tax scoring and the optimal tax trading? And see all that data upfront. Now, execute. And as you execute, see that happen: go through clearance, settlement, and respond. That’s a demand, that kind of frictionless – again, sitting in your car driving, you don’t expect to know how the rear end of the car works, you expect it to work. Having that kind of demand is what we should be looking for. And by the way, just to talk our own book here for a minute, that’s what we’re doing. We have relationships from the front-end to the middle, to the back. All the way from the security masters – where the product is created – down to and including how that tax is paid, how that regulation’s made, how the regulation reporting happens.

Shannon

What are some of the specific solutions that BetaNXT offers to its customers? I know you mentioned “it’s all the way from the front to the back-end”, but what’s specific solutions are out there?

Stephen

The first one, and the one that’s, that’s probably most basic – this will be a little bit like your mechanic telling you to open the hood and look at the engine – but the one that’s most basic is called ‘Operations Workbench’, and it is a product which BetaNXT has had in the works for a long time. The problem is the technical debt was so great, it was hard to get it built, because it’s actually like doing a diagnostic on your entire car from the steering wheel to the exhaust.

So Operations Workbench allows you to see all the pieces that are working, and not just to see where it’s not working, but to see what’s causing the brake. So another good example: cost basis. One of the most basic things about what clients need. Why? Well, because when they do a transaction, they need to know what they paid for that stock, or that bond, or that commodity when they bought it and the cost basis is key to what’s going on. That means when you do it, Operations Workbench has to be able to show where the cost basis were recorded and every place downstream that cost basis data is used. And I’ll really get crazy; it’s like Schrödinger’s cat. Schrödinger’s cat can’t exist in two places at the same time. Well, this is what this amounts to, the ability to see the data structures at every step along the way in that processing flow from different perspectives. The perspective of the regulator, what’s required to be important to the regulator? From perspective of the books and records accounting, how does it apply to EBITDA? How do you calculate that accounting in EBITDA to the perspective of the client? How’s that affecting my portfolio? And can I see the report for how that affects my portfolio right now?

Operations Workbench allows all those to happen at the same time. It gives you that perspective of seeing things from multiple directions. Now add to that, I’ll give you one more. Add to that the ability to do a front-to-back look at what products are available to you. There’s a great white paper – came out from the World Economic Forum last August that I was a part of the process of creating – that talks about the future of capital markets, specifically retail investing.

One of the things the paper says, and one of the things that I’m struck by is how important it is for the process to be trustable. For the investor and the advisor to be able to see the entire process and know, as they’re driving the car when they say “turn left”, it’s going to turn left. When they say, “We’re going to go to T+1,” and realize that’s going to happen, not think that means the back axle’s going to fall off. Sorry, long answer to a short question.

Shannon

No, no, not at all. I love the analogies too. Just to wrap up this segment, what is BetaNXT’s target market and what can we expect to see on the roadmap moving forward?

Stephen

BetaNXT now has…if you’re a sophisticated wealth manager who’s doing self-clearing in the United States, you’re probably a BetaNXT client. Even if you don’t realize it, you are a BetaNXT client. What we want to do is make sure that those clients are well served, so we are fortifying what we have to make sure it works better and faster, in a more real time way. But we’re also transforming it. By transforming it to make that data more easy to get access to; by reducing the need for reconciliations; by reducing the cost of actually doing this. So, you’re doing that at the same time.

That’s within the existing self-clearing market. At the same time, if you are aware of what the differences between self-clearing and fully disclosed, and you watch what happens to the effect of broker dealers’ ability to control their revenues when they’re fully disclosed as interest rates rise, you know what’s going to happen. You have more and more of them moving from being fully disclosed into an omnibus or a self-clearing mode. That will be more and more of where we’re headed for, and why? Well, because it dramatically improves their ability to make money when they control their own cash flows, and they control their stock loan that they can’t do when they’re fully disclosed.

Shannon

Well, I appreciate the context and background. That’s really helpful, Stephen. But it is time for segment two of this episode, which is “Ask Us Anything”, where I’ve gone out to the social universe and asked them to submit questions they want answered by you and you are a popular guy. Let’s see who’s dropping into the DMs this week. We did have somebody comment and say that they are curious on what your views are as the single biggest change in the way FinServe firms are doing business today versus a decade ago.

Stephen

At my core, I’m probably a data scientist. My first company that I created was a technology company, but even that company was based on data. The way data has morphed in the last decade from before cloud, to where cloud became possible, to where cloud became a stretch, to where cloud becomes the norm, is the huge change. That’s probably the single biggest change. Cloud as a norm means that the data is being delivered by – the visibility of the data, the ability to visualize it – and to deliver it to where the client wants to see it in ways we couldn’t even anticipated a decade ago.

And now, it’s green fields. Because you take firms – again, I’ll pick on InvestCloud the same way – you take a firm like InvestCloud. What you’re seeing is their ability to take the data that we’re using to explain to the client what their cost basis is, what their tax rates are, and be able to show that in a visualization that allows the client to make decisions in near real time. They couldn’t have dreamed of that a decade ago.

Shannon

Absolutely. We did have another question actually around integration. The lack of integration between core applications as we’ve mentioned earlier, is a huge pain point for advisors. While the ‘why’ of tech is clear at this point, is the importance of ‘how’ in tech somehow getting lost in all of this?

Stephen

The ‘how’ is hard. The ‘how’ is: the data has to be sourced coherently, organized consistently across functions and that ‘how’ means that we – as members of the community that supports the wealth management ecosystem – have to work together. The ‘how’ that’s hard here is getting firms like ours to work together to actually do things for the greater good. We have a trust, and going back to the World Economic Forum paper, the number one thing that came out of that paper was that investors – and by extension their advisors – what they really look for are institutions they can trust.

Now, we as the people who are building the applications – running the show, so to speak – for the wealth management world, that trust should require us to work together for that greater good. The ‘how’ of the integration is getting us to work together. Now, I’m not sure it can be done by regulation, although frankly T+1 is going to push us in that direction. I do think it will come from the demographics of the clients.

The huge tsunami of wealth that’s moving from my generation to your generation, the huge tsunami of wealth (I think the last thing I read was $.73 trillion, just the next four or five years) is going to move from the older to the younger generation. How that younger generation asks for, and expects to be served, forces us (who are the people running this show, running this plane, flying this plane) to actually be able to support it. The “how” means we have to work together to support the demand coming from the next generation of investors.

Shannon

Well, I like to call it the “Amazon effect” at the end of the day.

Stephen

There you go. That’s a great show.

Shannon

Well, one more question in this segment, and actually it’s coming from me. Because I saw the latest press release around the acquisition of Mediant Communications, so congratulations on that.

Stephen

Thank you.

Shannon

Absolutely. What does this mean for BetaNXT and how does it ultimately fit into the long-term growth strategy?

Stephen

Well, BetaNXT acquiring Mediant was an example of us putting our money where our mouth is. We say, “We think that you should be able to take data and have it to be coherent from top to bottom and across functions”. Well, one of the major functions that stands outside on the side over here is the proxy and the prospectus function. Why? Because it’s been so segregated for so long. The data that you need for proxies and prospectus just to do them effectively resides, at least invariably for Beta clients and BetaNXT clients, already resides here. Rather than having to recreate it and reconcile it and break it again, we’re going to incorporate it. We’re going to integrate it so that when a firm like Ameriprise wants to say, “I want to be able to do proxies and prospectuses and I want to be able to do them coherently without need for reconciliation,” we can say to them, “Here it is. We already have your data. We’re already responsible for collating it and curating it so you can use this for your clearance and settlement processes. We’ll use that same data already curated for your proxies and prospectuses.” It’s us saying, “We’re putting our money up.” Incorporating Mediant into the BetaNXT flow so that not only if it’s a Beta client or a non-Beta client, you’ll be doing this in a way that’s coherent for the clients.

Shannon

Well, I appreciate you being put on the spot, Stephen, and your insightful answers for that segment. But we’ve come to our final one, which is one of my favorites called “Stack It or Whack It”, where I’m going to throw out a few technologies or timely trends, not necessarily wealthtech related, and you tell me if it’s ultimately worth the hype or not. So essentially, stack it, aka use it, or whack it, aka lose it. So, the first one I want to talk about: everyone is discussing the importance of data. While there’s been a lot of chatter about real-time connected data – I know we touched on it earlier – but is data worth all the hype? Will this emphasis continue? And where do you see the future of the data capabilities going? And in its current state: “Stack It or Whack It?”

Stephen

Data is the closest thing we have to a silver bullet. If you want to kill a werewolf, you have to use a silver bullet. Nothing else will kill it. If you want to kill the – I’ll use a stronger word – the corruption, as well as the expense that hurts the wealth-management process, then focusing on data is the best thing we have to solve that problem. Why? Well, because it is the fuel that makes everything work or will make everything fail. Data that starts with the client, and there are, by my last count, about 60,000 different elements that you’ll have for a wealth-management client that will make you who you are, and they put you in your household, and you make your investment decisions. That data has to flow straight down through and be kept in line so they can be used all the way through the process without having it be recapitulated, broken, re-fixed again and again. Why? Well, because every time that happens, you’re allowing that data to be corrupted in ways that cost money, that prevents access to the information in a way that benefits the user, the investor.

You know that we can have an entire different conversation about the income inequality and why it’s happening and why it doesn’t get fixed. One of the best things we have to actually solve or at least move in the right direction to solve that problem is, in fact, having people do a better job managing the wealth they have. Wealth management should help people move from where they are to where they want to be. Having data that allows them to do that at a low cost with clarity and certainty is a big thing to help solve that problem. That’s why it’s worth the hype. Definitely worth the hype.

Shannon

So definitely stack it.

Stephen

Definitely stack it.

Shannon

All right. Well, number two, changing directions a little bit, but we’re seeing a flurry of M&A activity based on the press release today, but also just in general in the FinTech and FinServe space. What’s spurring this trend in M&A? And is it here to stay? And, again, in its current state right now in the markets and economy: “Stack It or Whack It?”

Stephen

I’ll give you the logic, and then the answer is still stack it, but I’ll give you the logic. Back when I talked before about the movement of money between generations and that movement of money causing a change in the nature of the client (the end client, the investor). That greater demand for more and more sophisticated clients, better products, less willingness to take the old solution, you’re not going to have a 401k that just has mutual-fund equities in it. You’re not going to take the tax effect that comes from not having an understanding of what products you should invest in to have the best return after taxes. You’re not going to deny yourself the chance to go into a higher-risk product that you think has an upside.

Why? Well, because you’re a sophisticated investor, and you’re driving where the advisors are going to go because you as a sophisticated investor are saying to your advisor, “I want to do these things.” And the advisor says, “Well, in the old days, the wirehouses were all marching bands, and they played John Philip Sousa, and that’s all they played. Okay? It was marching bands and John Philip Sousa all the time.” Well, the advisors who became registered investment advisor says, “We don’t play John Philip Sousa. We don’t want brass bands, we want jazz bands. And we want to be able to do this in a way that makes sense for our persona, our intensely-personified investment demands.” And therefore, the advisors were saying, “We can’t stand the wirehouses. We’re going to move from the wirehouses to an RIA status that gives us the ability to do that.” But they realized, in order to do that and still service their clients, they need access to some larger data structures.

So the M&A, a large part of what’s driving this M&A, and I’m particularly thinking in the RIA space, is because those Advisors are saying, “To service these clients, I can’t stay in the wirehouse, I’ve got to go somewhere else; but I need these larger data structures there for the LPLs and the Stifels of the world who let me have jazz bands. At the same time, give me the broader, deeper data structures that I need. That’s where I’m going.” That M&A is just going to continue to pick up speed. We see it every day. Especially in those large, sophisticated, self-clearing broker dealers, they’re going to move, get more and more of those RIAs moving from the wirehouses into their spaces. So, definitely stack it.

Shannon

Well, Stephen, I’ve really enjoyed our conversation today and getting to know you better and learning about BetaNXT. So please feel free to tell listeners where they can find out more about BetaNXT and where you’ll be next.

Stephen

Okay. Well, by all means, look on BetaNXT.com. Come and see us, we’ll be happy talk to you.

Shannon

And if you’re looking for more content specifically around solving for the integration challenges in this industry, don’t miss our WealthStack event (part of Wealth Management EDGE) May 21st through the 24th in Hollywood, Florida. Be sure to follow us on social media platforms, specifically LinkedIn and Twitter. Thank you all for listening today.

Source: WealthStack