Data-Driven Wealth Management With Stephen C. Daffron

In a recent Advisorpedia podcast, Stephen C. Daffron, Chairman and Chief Executive Officer of BetaNXT, talks with Advisorpedia founder Doug Heikkinen about how advisors can leverage real-time data processing to cater to their clients’ wealth management needs during market volatility.

Listen to the podcast at Advisorpedia: Stephen C. Daffron. Full transcript is available below.

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Transcript

Douglas Heikkinen
Hello, and welcome to the podcast. Today we are joined by Steve Daffron, the Chairman and CEO of BetaNXT, a leading provider of wealth management, infrastructure software. Steve is here to help us explore the potential avenues in which advisors can leverage real-time data processing, and accessibility to cater to their clients’ needs for wealth for well-informed choices in times of market volatility. Welcome, Steve.

Steve Daffron
Thank you. Nice to be here, Doug. Thank you for having me.

Douglas
BetaNXT is a fairly new company, can you explain what it is and what your offerings are?

Steve
Sure, thank you, BetaNXT is a fairly new company. We created it back in July of 22. But it’s a company that’s designed to power the future of connected wealth management. We are, with what we put together, we’re the leading provider of frictionless wealth management enterprise solutions, with real time data capabilities, and enhanced wealth and advisory experience. We’ve done this by investing in broad-based platforms, the newer products and the partnerships to accelerate growth, but the ecosystem of wealth managers that we serve, we do this through our software as a service, our data as a service, and operations a service approach. We do this to empower our clients, all these broker dealers, to deliver a comprehensive end-to-end advisor and investor experience. We did this last year after looking at for a long time and studying it for a long time. Because with Clearlake Capital and Motive Partners, two private equity firms, we knew that we wanted to create something that had all the components brought together. So we launched this back in July of last year to bring together the research we’ve shown it was giving us proven wealth management solutions, Beta, which is a company that was new technology that we’ve been around a long time, we’ve added dramatic new technology to it, Maxit, which is the old Scivantage, which again upgraded the technology bringing more to bear on it, be able to do cost basis in near real time, tax reporting in real time, and then most recently, Mediant, which is a client communications firm, bring them all together, integrating them into a single integrated platform, so that the clients can see this front to back. And we do this deliberately to improve the advisor experience. That’s where the rubber meets the road. Advisor experience—to give the advisor intelligent, user-centric technology with specific, in-depth, notable industry perspective and robust a partner network so that they can have access to everything that’s out there, not just what their what their particular firm had at the time. We have an operating history of these firms coming together over 40 years. So, it’s not like we’re starting from scratch. The firm services a broad swath of the world of the wealth management ecosystem. We have more than 50 million retail accounts we’re servicing now and another 80 million that’s processing across the communications world. That’s 6 trillion assets on the platform. That’s more than 35 million transaction-related transactions in securities every day. We serve the ecosystem. So, whether you’re a large wealth institution, the largest of the of the self-clearing broker dealers, whether you’re an independent wealth management firm, whether you’re a small digital broker dealer, we service you to give you the things you need to do to have that advisor and that investor experience. We support clearing platforms front-to-back, and our recent acquisition immediate, we’ve also expanded the audience to banks, brokers, corporate issuers, and funds.

Douglas
So, you’re an industry veteran. Can you share a little bit about yourself, your background and how you got here.

Steve
As a veteran, that’s a that’s a kind of way of saying I’m old. That’s pretty true. I’ve been around a long time. I actually had a career as a soldier first, and then I became an academic and back to graduate school and became a professor of economics. And then in the late 80s, actually created my first company while I was still a professor, again, focused on data and data science of that time. And then from that creation of a first software and processing company focused on the futures and derivatives into the investment banking world with Goldman Sachs, and then from there into the hedge fund world, working for a number of hedge funds, most notably Jim Simons at Renaissance from that back into investment banking with Morgan Stanley, where I became the head of technology and data and operations. And then from there, and back into the private side, where I started doing private equity. First with Warburg Pincus, and then Silver Lake. And then in 2016, as I said, myself and two partners, decided that we should be creating a private equity fund that would allow us to focus on the parts of the, of the ecosystem that we knew something about, that we had an edge in that we could help create value, by being able to create the data structures and the operational processes that improve the working capabilities of the wealth management advisors. That became well, I became Motive Partners, which led to the investment that I was just talking about. I’ve been around a long time.

Douglas
So, having all that experience in the industry and knowledge of previous cycles, where do you see the industry going now? And what should advisors be focusing on and thinking about?

Steve
Well, wealth management space is evolving to be available to everyone. And wealth management should be available to everyone, even if you only have a spare $10 accessible to anyone so that you can actually have the creation of wealth management that gives the end client the chance to do the right thing with the availability of his or her revenue, you know, one of the things that we that we have to be conscious of is, the world itself is changing. We’re passing a huge tsunami, my latest research that I saw $3.7 trillion worth of, of money from, from my generation to my children’s generation and my grandchildren’s generation, the idea that that, that the wealth managers are going to be able to take that tsunami of new funding, and to do with it effectively with what the tools they have, is foolish, they need new tools, they need new capability, because not only is there a lot more money, more people investing more money in a demand and have an increasing technical sophistication for both the investors themselves and the advisors who advise those investors and the committee, they’re there for a commensurate increase in the demand for the tools that those advisors have the sophistication of products that they that those investors want, and the timeliness of the delivery. In easy example, when when my father invested, you know, if he got a monthly report on his mutual funds, he thought that was sufficient. When I invest, and I expect to see a weekly or a monthly update, and be able to get an analytics on my investments. But my children and my children’s children are expecting and getting the ability to see that in real time. Corporate Actions is good example. Every advisor wrestles with corporate actions, why? Because when a stock splits, or there’s a merger, that that advisor has to be able to understand what that means for his clients, their portfolios, and be able to give them advice in that space. But right now, that data is often not available or non-reconciled. One of the whole ideas of BetaNXT is to make that data available in real time; to make it available so that the adviser can take a look at that and say, Okay, here’s how that corporate action affects my client to maximize portfolio. And therefore, here are the alternatives that I have to offer those clients. And then the clients themselves can then turn to have a better answer, or how they want to invest their additional funds. Now this, this idea that that all we do, all the advisor does, is pick stocks is just it’s an archaic idea. The advisor is in fact an advisor who is expected in the clients will more and more expected value to be see the entire across the entire horizon and be able to make the choices that are best for that client. You know, another good example, besides corporate actions, this is one of the ones that I was wrestling with this morning, is clients need to see their cost basis, they need to see not only what trade they’re making, what portfolio adjustment they’re making, but the cost basis of that adjustment. Why? Because that will affect how they whether they keep it or don’t keep it to the fact they’re there the tax effect of that, of that portfolio entry. They need to do that, so that they can make tax on the tax optimize trades, and have the overall result be positive for them. Where’s it going, it’s going to where this a bit advisors are going to want and demand better tools. It’s going with the clients are going to turn to the advisors and expect them to have better answers and have those answers in near real time. That’s the kind of direction that the industry is headed.

Douglas
Talk about some of the challenges BetaNXT is helping wealth advisors and investors solve for.

Steve
The shorthand I use for this, as I said, when I talk to my clients about what their advisors is we’re helping their advisors eliminate swivel chairs, you know, swivel chairs to an advisor sits in her chair and has to look at one screen and make an adjustment or put some again in a swivel chair and make a look at it as a screen and to put the same entry or comfort the same perfect filiation. In that screen. We’re trying to give them a better answer on a complete set of data sets, thereby improving their thickness and frankly improving their ability to have time to pay attention to their clients. I recently wrote a, a piece case put it by McKinsey that says right now, wealth advisors are spending only 30% of their time working with their clients, advising their clients or spending most of their time trying to figure out where all the pieces of data they need to get access to reference to be able to give that advice. So, we want to take that advisors time and make more available to understand what is possible to their clients portfolio. Again, an easy example, the biggest single demand that we hear and that they the World Economic Forum, white paper, where it references the biggest single demand in the in the wealth management space from clients as they want more access to better, more sophisticated products. Take alternatives, for example, alternatives, they want to be able to get access to those. Well, to do that, the advisor needs access to the data on alternatives, which is not standard equity stuff. It’s not, it’s not in buying a bond, it’s actually taking the alternative, making it clear for that client. And to do so effectively, take securities lending, right now, we look at the portfolios and realize that most of the clients, most of the large firms, broker dealers who are advising clients, aren’t able to take advantage of the securities lending that’s available to them, because they don’t have the data at the right time at the right place for that advisor to use to help that client make that kind of change. Same thing for the for the fully paid lending. Same thing for tax optimization, there’s mentioned right now clients who make trades, will actually put themselves into a tax bind, not because they’ve made that decision deliberately. But because they didn’t have the data available in the timeframe, they needed it to know whether or not the met that trade was actually tax optimized for them. We can do a score, we can do a tax score literally every day, for a client to say to the client to help the advisor be able to save the client, here’s what this does for you. Here’s why this helps your portfolio achieve its optimization, not just the return on this trade, but optimize return, including what you have to pay in tax.

Douglas
Give us some of the benefits that advisors can use from implementing real time data processing.

Steve
Yeah, the one that, again, the one that I would point to first because it’s the one that I hear the demand curve coming across most clearly, is, in fact, new and better products. The World Economic Forum white paper that came out last year talked about what it’s called the future of capital markets and focus on retail investing. And it talks about the relative returns that someone can get who’s in the middle of the wealth management curve, you know, the mass affluent, not the ultra-wealthy and nothing institutional. But the people who have that spare $10, or that spare $1,000 or $10,000, want to be able to do something with it, the returns they can get on that have been limited, because of the access they have to the products that are being offered to them. It’s not that they’re not sophisticated. It’s not that they can’t understand what the risks are, is that the data necessary for them to offer to be to have those products are so expensive, that the advisors and the firms those advisors work for haven’t been able to put them together in a way that they can deliver to the client in a way that makes economic sense, because was too expensive. That’s the last generation’s answer. The next generation is going to say, we know how the data structures go front to back, we can now see this front to back, we don’t have to have the expensive reconciliation, because BetaNXT has already done that for us. And they can actually connect this directly into a company like case, which actually has alternatives. They have a library of alternatives that you can access access to. And BetaNXT will pipe it, plummet if you will, up from there to the advisor. So, the opportunities for advisors are first and foremost, to have more and better alternatives to offer their clients. Same thing with securities lending, that’s really a broader financing question. You can’t do fully paid lending, or you can’t do securities lending unless you have the data that’s available in the right time from the available. What real time data processing does is it lets you do that so that you, the client and you the advisor can make better decisions on things like tax scoring and tax optimization. It’s actually both simple. And that the solution is really to get the data structures to be aligned and to be available in near real time and complex because getting data structures to be aligned in there in this marketplace is hard. Because we’ve had a history of technical debt in the wealth management space, where people have relied on old technology, legacy technology, for so long that they simply take it as is that the witness the way the world turns, it’s not required anymore. Look at what we’re doing in BetaNXT, look at what we can do to give you real time near real time information to make those kind of choices. That answer your question?

Douglas
It did it did. Can you share some of the details on the acquisition you recently made and what added value this brings to BetaNXT?

Steve
Yeah, sorry. It’s really part of the same narrative, part of the use the term keiretsu. When we do our research that says, what did the advisors need? What are the firms’ need to sponsor those advisors to improve that advisor’s experience, and we ask those firms what they need, they tell us. And they tell us in the context of what those advisors need have access to and when they need to have access to it. So, in the case of Mediant, which was our most recent acquisition, it was because of the firm for telling us look, we are already paying you BetaNXT to have the data for all of the transactions we do for all the positions we sold, to be able to do the analysis now that you do for us. Why do we need to pay another firm? That’s actually operating in a Manila monopolistic practices and pricing approach. Why do we need to pay another firm to take that same data and charges again, the curation delivery of that data in terms of proxy prospectuses and confirms and account reporting? Why do we need to do that? Why can’t you do that for us, because we already have the data, we’ve already worked in order to curate it in a way that allows us to deliver proxy prospectuses, for example, in in a much shorter period of time, a much less expensive processing flow, and frankly, a much better output. For the advisor. I’ll give you an example, to 1099s that you have to do every year, that when you’re doing them in via another processing flow, you’re actually having to do them do the entire processing flow. And sometimes that takes longer, and it’s delayed because they’re doing so on a back cycle. We can do 1099s, literally any day, every day. That so that the client can see what their tax implications will be. The approach to investing in Mediant, and the ones that will follow, will be the approach of giving those firms, those advisors, what they need to do to have that complete set of answers for those clients where we take it pretty seriously. If you look at the all the firm’s we invested in—from InvestCloud to Tegra 118, to Cais, to BetaNXT to Mediant to Wilshere to Forge—all the ones we’ve invested in have been deliberately built with the idea of improving our offering for that entire set of requirements that that advisor needs to have supported. That answer your question?

Douglas
It did it did. Steve, the future is very bright. You’re making it simpler. It’s really interesting stuff. Thank you so much for joining us.

Steve
It was my pleasure.

Douglas
To learn more about BetaNXT, please visit BetaNXT.com. Please follow us for timely updates on Twitter, LinkedIn, and Facebook all at Advisorpedia. For everyone at Advisorpedia, our producer Julia Smollen, our engineer Tory Miller, and the Power Your Advice podcast team. This is Doug Heikkinen.

Transcription reprint from an Advisorpedia podcast recorded on August 18, 2023