Watching the heated robo advice competition between upstarts and incumbents the past year, Mitchell Caplan is awash in a sense of déjà vu.

It was well over a decade ago that Caplan sold the virtual bank he launched, Telebank, for $1.8 billion to E-trade, eventually assuming the role of CEO and director of E-Trade.

All the big problems that firms are wrestling with in the digital advice space right now – Disruptive new technology! Competition! New markets! Challenge to innovate! Big data! – are very much the same industry challenges of the mid-90's and the early 2000s with the advent of online brokerages, says Caplan, now CEO of Jefferson National.

Which is why to better understand the direction of digital advice, it's good to take a history lesson, he tells Re: Invent|Wealth. 

"The companies that got it really right in the mid-1990s all the way to the middle of the 2000s and even 2010, were the ones who were trying to figure out, "What was that nuanced change that they kept seeing every year around the use of the Internet?" Caplan says.

What are the challenges facing independent digital platforms right now?

There are a lot of different models within the ecosystem of the digital advisory experience. There are some who are building models where it’s a very traditional, direct-to-consumer business. It's hard. And I lived it. To give you an example, Telebank in the first year of its existence spent probably $100,000 on sales and marketing. In the last year when we sold E-Trade, we spent probably $50 million a year on sales and marketing. And then E-Trade over the course of seven-and-a-half quarters spent $1.5 billion in marketing.

The reason was capital was free and there were two very interesting things that were happening at that moment in time. One was there was this euphoria around the promised land: the sheer number of people who you could reach if you could reach them effectively and there was a lot of capital being thrown at it. And you had a number of players who had real capital available to them, spending it to create a category. Whatever E-Trade was spending, so was Ameritrade, Schwab, Fidelity and Vanguard.

So, you had the creation of a whole new category. What I was challenged with candidly was less around the creation of the category of online trading that went from zero to 34% of all trades in 18 months. The challenge for me and for E-Trade was changing from online trading to online investing while continuing to expand the brand.

When you want to build a direct-to-consumer brand, it costs a lot of money. And it is probably less today and maybe even meaningfully less than we did all those years ago because you have the benefit of digital. And so you have social media, in which you can create a viral brand and it works both for you and against you, but it's a far more cost effective way of doing it. It is still a lot of money. And the cost of acquisition is high against a client who may not have a lot of money and therefore the revenue generated from the economics doesn't work. That's a model.

There's a whole other model which says, I am going to build tools and solutions for advisors. I could see at E-Trade that as a client was building wealth, they needed some sort of advice and that advice needed a human capital component. They needed to be able to interact with somebody. Maybe not face-to-face, but it could be over the phone, digitally, it could be chat. But we knew there was nothing that would supplant the power when needed of human capital. And so I think there are business models that are saying, "What are the tools?" and maybe the industry is finally waking up and saying, "A robo advisor is a totally wrong word. It's not robotic."

Why is it wrong?

At its most extreme it is an automated allocation model. And everybody who is in the space is realizing that that is probably not enough. What it needs to be is not an automated allocation model, but a digital experience. And then the question is, is that digital experience going to be direct to consumers, which are some models; or is it going to be through advisors, which is what we have exclusively banked on and believe is the reality of the world.

When I got involved with Jefferson National, the trends that I bet on were first and foremost that high-end mass affluent, emerging HNW, was a very fast growing ecosystem within the wealth management spectrum and that in many respects the needs of that group had yet to be fully met.

So, if you think about it, HNW and UHNW get everything they want. They negotiate. Main Street gets what they want because the demands are not that great. Mass affluent changed the marketplace around what a consumer demanded and I think the next iteration is in this world of high-end mass affluent, emerging HNW. They are going to start demanding the same value and will say, "I am as powerful a force as UHNW, and frankly there is no justification for me getting caught in the middle in terms of cost, in terms of what is benefitting a UHNW consumer and a mass affluent consumer. I should have all the tools and all the same options around price and value."

Would you say the innovation is happening with the consumer first, rather than the industry?

The consumer is driving the demand for innovation. I think people who try to innovate recognize that there is an ecosystem in flux and they are trying to figure out how to provide solutions to that.

Is that why incumbents may be perceived as flat-footed with innovation?

One reason is that you fight bureaucracy as you get bigger. That is the way of the world. In some ways it is phenomenal to be more successful, but when you look at organizations that by their nature are incredibly innovative, they are constantly trying to figure out how to shake it up to fight what becomes the lethargy of incumbency.

Are they thinking enough about how much they need to dedicate to the issue?

I think the Googles of the world are very unique. In trying to constantly fight the lethargy of incumbency and try to figure out how to really remain innovative, the very nature of becoming powerful in scale and meaningful marketshare results in the mindset, "I'm good. I've done it right. Why wouldn’t I be right? Why wouldn’t I be thinking about this the right way? Look how successful I've been." I think there is a certain degree of that.

I also think there is a certain degree of, "Listen, let's let all these people who are young and innovative and creative, as organizations, figure it out and I'm going to use that  as an interesting observation of what's changing and figure out how through my scale, if I need to, I can change and adopt."

Either you remain flat-footed because you keep your eyes closed – and the perfect example I can give you is, in some ways, should Schwab, Fidelity, E-Trade or Ameritrade be in existence today? Not really. Because if Morgan Stanley, Merrill Lynch and everybody else figured out how to aggressively compete, they could have probably put all those businesses out of business; certainly the ones like E-Trade and Ameritrade who were young and building scale.

I also very much believe that the people who get it and see that there is a need for change, their systems aren’t set up from a technology perspective, their infrastructure isn’t set up for, "I am going to create a unit and really allow it to effectively grow and prosper independent of the mothership." So I think that's a big part of it too.

Jefferson National recently integrated with Quovo. What's the value of big data for your firm?

Big data is the competitive differentiator of the 2015 to 2020 or '25 time frame, just as you saw the adoption of the Internet and the advent of it as a distribution medium in the mid-1990s.

I think the world continues to change and I think one of the most significant and transformative events in my lifetime in running companies in financial services was the world coming to the realization that the Internet didn't cure cancer,  but what it did do was create a low-cost distribution channel.

People really miss the big picture. This happened in the world of banking. Banks who said, "Eh, mobile banking is just a service. It's not a channel, it's just a service. And I am going to offer it and maybe I can charge for it, but it's part of the package of which I offer." I don’t think that was the right way to think about it.

The companies that got it really right in the mid-1990s all the way to the middle of the 2000s and even 2010, were the ones who were trying to figure out, "What was that nuanced change that they kept seeing every year around the use of the Internet?"

Now, I think the next big thing is the aggregation of data. And you see it on one side with all of the privacy concerns, and you see it forever focused on the negative. What about on the positive? What about where data that can be aggregated in a really powerful way for consumers to make their life better?

So, think about it this way. You're a consumer and you want something. You are thinking about a single-point solution. You go to the Internet and you type into Google and it comes up and you see stuff about a single-point solution.

Wouldn’t it be unbelievable if you could type in a more holistic request and what came up was a way to think about aggregating all of that information in a more holistic request? I think that's what eventually is going to happen with big data and that will change everything. I think it is going to change consumers and consumer behavior, and how they either access or don’t, or how they want it services packaged in a way in which it is better and more powerful for them. I think it will be powerful for people who are distribution companies and I think it will be powerful for companies to manufacture because utilizing that data in a positive and constructive way puts power back into the hands of the consumer.

Within the financial advisor space, how do you actually take big data and monetize it?

At the end of the day what makes me as a franchise and successful as an advisor is I have gone from being a stock jockey to an investment manager to a wealth manager. You can count on me to look after your entire balance sheet. I am going to look at the asset side and the liability side, and I am going to do the right thing for you and I am fee-only. I may charge a structuring fee to start. I may charge and ongoing monitoring fee and I may also charge something in basis points, and I think that has yet to be determined.

Pricing is going one way and it is down, and I think it should. I think it is the right thing for the consumer.  So, it doesn't matter to me what the consumer pays the advisor, what they pay in the underlying cost to the manufacturer or the distributor, everybody is going to need scale because the winner in this is the consumer.

You are a consumer-driven business. That's who you are serving and people forget that. At the end of the day you have to make their life better and if you make their life better, they are happier and they will do more with you. If they do more with you, your franchise will be worth more because you will be in a better place.

Another way to think about data is: does it make you a more powerful advocate for your client? Does it allow you to actually benefit? Because there are asset streams that are held away and get moved in under your purview. Or you can at least see a more holistic picture of that client, so if you are truly being a wealth manager and charging for it, you understand everything. It's all being imported. You have as complete a picture as possible, which allows you to be as powerful in your advice that you are providing to that client.

And I think you can charge for it, either on a standalone basis, and in many respects it will be embedded because it will be one of the key tools in the arsenal to help you gather assets for which you will be paid. So, in effect it becomes a client acquisition tool. 

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