In yet another sign that technology is having a big impact on the wealth management industry, five leading RIA firms are banding together to create a fintech accelerator: ScratchWorks. This new platform is designed to identify and fund promising fintech startup companies.
The group held its inaugural meeting during the Barron’s Top Independent Advisor Summit, which took place recently in Orlando. Staged like the TV show “Shark Tank,” three fintech companies presented their pitch to ScratchWork’s five investors before roughly 500 of the industry’s largest independent advisory firms. Fidelity Executive Vice President David Canter served as the program’s emcee and host.
The five investors from leading RIA firms were: Marty Bicknell of Mariner Wealth Advisors, Jon Jones from Brighton Jones, Richard Burridge of RMB Capital, John Eadie of Covenant and Michael Nathanson of The Colony Group, who collectively manage more than $60 billion in assets. Sponsored by Fidelity, eMoney and the University of Colorado’s Leeds School of Business, ScratchWorks attracted more than 50 fintech firms, who gave their pitches for venture capital investments, strategic partnerships and distribution agreements.
What motivated the leaders of these RIA firms to launch ScratchWorks? “Technology is constantly transforming and evolving, and we formed ScratchWorks to join forces with the most innovative minds in the industry,” Bicknell explained at the event.
“Disruption, for those who embrace it, is an opportunity. But how do those ideas get discovered, how do they come to life? How do they get put in motion? That is the motivating force behind the ScratchWorks fintech accelerator, which is to connect innovative technology companies and their entrepreneurs to wealth management leaders,” he said.
After a rigorous review process that included input from experts at the Leeds School of Business, 10 semi-finalists were identified for further consideration. That group was later whittled down to the three finalists that gave their pitches live to the ScratchWorks investors at the Barron’s event: InvestmentPOD, Circle Black and Snappy Kraken.
Finalist No. 1
First up was InvestmentPOD. CEO Jacqueline Ko Matthews pitched her technology platform as a multi-strategy, white-label robo-advisor for advisors.
“Everybody wants to build a portfolio that stands the test of time,” she said, noting that every 10 years or so there has been a major market downturn that can significantly impact client portfolios, such as what occurred during the financial crisis of 2007-2008.
Matthews’ idea is to leverage technology to create a platform that combines a multi-strategy portfolio management approach with both asset and strategy diversification in order to lower the costs typically paid to expensive outside, specialist money managers. Through automation, algorithms and technology, she can simplify the process and make this platform more accessible — allowing advisors to make these sophisticated investment strategies cost effective for all their clients, not just those with a high net worth.
“The current crop of robo-advisors is over simplified and only provides one approach, passive indexing, which has become over commoditized,” she explained. “To justify their 1% fees, advisors are going to have to provide a higher service level, such as dynamic indexing, which historically has been done through manual efforts and expensive outside money managers. We are bridging this gap with InvestmentPOD, by using robo-automation to deliver a sophisticated multi strategy approach.”
The ScratchWorks investors had mixed views on investing in Matthew’s platform. Jones said Brighton Jones is more focused on life planning, so InvestmentPOD “tastes like a bunch of frozen chickens.” Burridge and Eadie had questioned the $9 million valuation. Bicknell and Nathanson, though, saw promise in the platform and made a significant “exploratory” investment offer, which Matthews accepted.
Finalist No. 2
Next up was Circle Black, a technology platform that “serves as an independent hub that moves data among all applications [that] advisors use, such as CRM, performance reporting, financial planning, rebalancing and more, so that data is where it needs to be and when it needs to be,” said CEO Jon Michel.
“What this does for advisors is to allow them to have the technology stack that is appropriate for them and their business model, yet it can be different for each and every advisor. Additionally, Circle Black enables advisors to … manage the clients’ 401(k) accounts as it aggregates data through a patent pending process,” Michel explained.
“Trust is a big issue with investors these days, and technology is one way to provide the transparency that builds trusted relationships,” he said. “For investors, they want to know four things: How much do I have, how is it doing, is it being watched and will I meet my goals? With Circle Black, clients can get those questions answered on their phones, and through workflow efficiencies and integrations into the main systems [that] advisors use on a daily basis, further enabling advisors to be able to manage the entire relationship.”
The ScratchWorks investors again were split on their investment decisions. Nathanson, Bicknell and Eadie all had a hard time rationalizing the $60 million valuation Michel had put on the business, so they were out.
Jones brought up the tricky issue of cybersecurity and did not want to take on that kind of liability in case of a data breach, as Circle Black would essentially become a data hub. Burridge, however, was intrigued by Circle Black’s elegant interface, and while he didn’t make a specific offer, he did agree to work with Michel on a distribution strategy.
Finalist No. 3
Last up was Snappy Kraken, a marketing automation platform that helps advisors automate their prospecting, marketing and onboarding of new clients.
According to CEO Robert Sofia, “We want to enable advisors to use technology to accomplish important business objectives, including to better attract new leads, nurture those leads into appointments, serve existing clients through automated communications, generate a steady stream of referrals and ultimately to automate as many business workflows as possible.”
Because there’s no solution that can do all these things in one place today for advisors, Sofia believes Snappy Kraken is set to become a key operating system for the financial-services industry. “We provide agency quality content, full automation and complete marketing campaigns that are affordable,” he said.
The ScratchWorks investors agreed that Snappy Kraken held a lot of potential for the industry and were eager to make a deal. Despite Sofia’s rich valuation of $10 million, the ScratchWorks investors bargained aggressively to make a significant investment for a minority stake in Snappy Kraken. After a dramatic pause of several moments, Sofia accepted their offer right on stage.
Initiatives such as ScratchWorks are an example of what lies ahead for fintech, as advisors themselves jump into the VC game to invest in their collective future. To learn more about what went on at ScratchWorks, check out #BarronsTIAS on Twitter.
Timothy D. Welsh, CFP, is president and founder of Nexus Strategy, LLC, a leading consulting firm to the wealth management industry, and can be reached at firstname.lastname@example.org or on Twitter @NexusStrategy.