While my last article was admittedly on the softer side, more personal musings than anything else, the next few installments are designed to be more interesting to the practitioner -- those busy with the task of building their firms for the betterment of their clients and principals and their broader community of stakeholders.

For this group, the technology stack is a critical component of their business infrastructure. After having a winning leadership team, having a winning tech stack is probably the second most important piece of getting a wealth management business on a path to long-term, sustainable growth.

It all starts with having the right tools, and the consequences of getting this part of the buildout wrong means years spent trying to unwind bad decisions and destroying value by resorting to the age-old answer of throwing bodies at problems. Fortunately, the wealth tech stack is in the midst of a technological renaissance right now, and those who embrace it will massively enhance team efficiency, improve the client experience, and drive outsized growth.

In this article, we will explore the first three essential elements of the RIA & Family Office tech stack: custody of the assets, management of the assets, and movement of the assets.

Future installments will cover reporting tools, research enablers, and other crucial components of THE STACK.

Custodians: The foundation of RIA & Family Office operations

Custodians play a vital role in the RIA & Family Office ecosystem, safeguarding assets and providing essential services such as trade execution, asset transfer, account administration, and compliance support. The "Big 3" custodians—Schwab, Fidelity, and Pershing—dominate the independent RIA space, collectively holding approximately 84% of all custodied assets in the United States.

This statistic excludes large RIAs affiliated with banks or investment banks such as Goldman Sachs, Morgan Stanley, JP Morgan, Citi and UBS though perhaps somewhat paradoxically, this latter group dominates the custody of family office assets.  The nuances of why this dynamic has developed in the way that it has is a story for another day, but it presents an interesting case study in incentives.

The Big 3 Custodians

1. Schwab: Known for its robust technology platform and comprehensive suite of services, Schwab custodies approximately $10 trillion in client assets, and enjoys a commanding share of the RIA custody business.

2. Fidelity: With around $15 trillion in custody assets, Fidelity offers a wide array of investment products and services tailored to independent advisors, but unlike Schwab, it is not a bank and is also not a publicly traded company. These two facts present very distinct strengths and weaknesses, which are worth exploring when making a custody decision.

3. Pershing: Holding about $2.5T in client custody assets, Pershing is recognized for its strong operational capabilities and integrations with various financial technologies, as well as for the quality of its own technology platform: Wove Connect.

These custodians not only provide essential services but also have established reputations amongst clients, making them suitable, safe choices for most independent RIAs, though (again) on the family office side, traditional banks generally custody most of the assets.

Alternative Custodians

While the Big 3 are dominant players, several other custodians are important to mention based on the specific client needs and/or profiles that they serve:

1. Global Custodians: Firms like Northern Trust, Bank of New York Mellon (which owns Pershing), and UBS cater to high-end institutional clients and/or those with cross-border needs.  JP Morgan is often mentioned in this group as well. They offer specialized services that may be necessary when working with complex entity structures that are common amongst “U.S. adjacent” family offices and very high-end clients of RIAs. While the nuances of these structures are beyond the scope this article, this article provides good background.

2. Emerging Custodians: Newer entrants such as Altruist, Apex Clearing, TradePMR, and Interactive Brokers provide unique value propositions tailored to specific RIA and family office archetypes. For instance, Altruist focuses on providing a user-friendly platform for smaller RIAs looking to streamline their operations.  On the other end of the spectrum, Interactive Brokers is known for its low-cost trading, global market access, advanced trading tools, and a wide range of investment options, making it particularly appealing to family offices and RIAs who are active traders, but not quite at the level of needing prime brokerage relationships with “The Street”. Importantly, the rise of the emerging custodians, with their focus on APIs and efficiency, have pushed the “Big Three” to innovate and improve upon their own technology platforms, which has provided the connectivity upon which our present  wealth tech renaissance has been built.

3. Broker-Dealer Affiliated: Firms like LPL Financial and Raymond James, and a host of others are mostly beyond the scope of this discussion, because they offer vertically-integrated platforms combining technology along with asset management and other services and generally crowd out 3^rd party technology vendors.

Asset Managers: Evolving from point solutions to comprehensive answers

Asset managers are crucial to the construction and management of investment portfolios. The selection of an optimal asset manager often depends on the size of client portfolios and the complexity of investment needs. Importantly, the management of assets has rapidly evolved over the last few years from trading and rebalancing living in one camp and underlying implementation in another, to a new world in which sub-advisors manage trading and rebalancing operations, as well as investment discretion in one account, greatly reducing the burden on RIA and family office operations personnel.

Liquid Portfolios Under $1 Million

For investible portfolios below ~$1 million, RIAs typically employ ETF or mutual fund strategies. Key players in this space include:

DFA (Dimensional Fund Advisors): Renowned for its evidence-based investment strategies.‍

Capital Group: Known for its long-term investment approach through mutual funds.‍

BlackRock: A global leader in investment management offering a wide range of ETFs.‍

55ip: Provides innovative tax-efficient investment strategies.

These firms not only provide portfolio oversight but also offer trading support and valuable research insights for RIAs and their clients.

Liquid Portfolios Over $1 Million

Traditionally, larger portfolios of marketable securities utilized separately managed account (SMA) strategies. Notable providers include:‍

Breckinridge, Nuveen, PIMCO, BlackRock: Among the many groups that specialize in providing fixed income investments across the credit spectrum to both taxable and non-taxable investors.‍

Parametric, Aperio (now BlackRock), Nuveen:  Also among the many groups that provide passive equity strategies with tax loss  harvesting overlays.

The UMA Revolution

In recent years, Unified Managed Accounts (UMAs) have gained popularity among RIAs and Family offices. UMAs allow various investment vehicles—such as stocks, bonds, ETFs, and mutual funds—to be integrated within a single managed account. This approach streamlines trading and rebalancing processes significantly.

Brooklyn Investment Group, led by Erkko Etula, is at the forefront of this UMA revolution. Their technology-driven approach reduces the time spent on trading and rebalancing by an estimated 90-95%, posing a significant challenge to traditional Turnkey Asset Management Platforms (TAMPs). Importantly, many of the firms listed above are also introducing similar strategies that emphasize efficiency through advanced technology.

Managing asset movements: coming out of the wilderness and into the 21^st Century

Managing asset flows and payments has always been one of the critical functions that RIAs and family offices manage on behalf of their clients/principals.  And while the words “Bill Pay” are something of a dirty word in the industry, managing money movements is a widespread and important practice.  Why?

RIAs and Family Offices handle payments for their clients for three primary reasons:

1. They are trusted.  The first reason stems from the extraordinary trust clients and families place in their advisors. These clients expect a concierge-level service that extends far beyond traditional financial planning and investment management. Safe and timely payment processing is a crucial component of this comprehensive service, covering areas such as taxes, capital calls, real estate transactions, philanthropy, and personal expenses. However, until very recently, there has been no unified solution that seamlessly connects custodians, banks, private investment platforms, CRMs, vendors, and reporting systems for these cash flows under one roof.  Such a solution was absent because the custodial platforms did not have the technology available to allow vendors to build such tools, but in the last few years that has changed radically and is one of the primary drivers of the wealth tech renaissance mentioned above.‍

2. They help manage risk. Secondly, RIAs and Family Offices manage client payments to provide risk management and oversight controls. This is particularly crucial for clients with complex financial structures and  diverse payment obligations. By overseeing client payments, firms can implement robust controls that protect clients from missed payments and fraud while maintaining a documented audit trail. However, these controls often result in a cumbersome process that requires client service and operations teams to spend more time on manual tasks and less time interacting with clients.‍

3. They help build understanding.  The third reason revolves around addressing basic cash flow questions that clients and families frequently ask: What was our starting balance? How much did we invest? How did our investments perform? And how much did we withdraw? The last question, concerning withdrawals, often proves to be the most challenging for firms to answer accurately. Historically, this information has been scattered across various sources, including email inboxes, custodian exports, and portfolio management reports, necessitating  the creation of complex spreadsheets to consolidate the data.

In response to these challenges – the need for concierge-level service, risk and oversight controls, and detailed cash flow reporting – Atomic Insights is developing a modern client payments platform. This solution aims to streamline and improve the payment handling process for RIAs and Family Offices, ultimately enhancing their ability to serve clients effectively. Check us out here:  www.atomicinsights.io.

Future Tech Stack Discussions

In upcoming articles, we will explore additional essential elements of a comprehensive RIA tech stack, including:

1. Reporting tools

2. Research enablers

3. Customer relationship management (CRM) systems

4. Financial planning software

5. Risk analysis tools

6. Marketing and client communications platforms

The optimal tech stack configuration often varies based on firm size, client complexity, and specific business needs. Industry experts like F2 Strategy, Michael Kitces, and Joel Bruckenstein have provided extensive research and insights on these topics, serving as valuable resources for RIAs looking to build or optimize their technology infrastructure.

As the wealth management industry continues to evolve rapidly, staying informed about the latest technological advancements and best practices is crucial for RIAs and family offices to maintain a competitive edge while delivering exceptional client experiences.  More to come on all of that...

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