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An open-architecture approach to building new tools

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Custodians and asset managers are increasingly focusing on the RIA technology space, hoping to seize a multi-billion dollar opportunity to supply tools to a swelling breakaway advisor market.

Orion CEO Eric Clarke espouses an open-architecture approach to building such tools for RIAs.
It's a strategy that has borne out a number of integrations and new initiatives for the Omaha, Nebraska-based firm, from a feature enabling trades directly from an advisors' CRM, to supporting an effort to create a standard for client data transfer and protection in the industry.

"As other industry providers consolidate their offerings, it creates more and more opportunities for us to serve that independent advisor [who] wants to create the technology stack that's the best fit for their value proposition," Clarke said.

Security, ease of workflow and the ability to work across platforms and tools are key features RIAs are seeking, Eric Clarke said, as independents continue to be selective about how they equip their practices. This is despite the bundled offerings made available by custodians such as TD Ameritrade and Fidelity.

There's an opportunity for the industry to better protect sensitive client data, Clarke added. He highlighted the cleverDome effort, a proposal for competing vendors and wealth management institutions to join a closed, secure network under the control of a new type of corporation that must act in the public interest.

Speaking with Money Management Executive, Eric Clarke and Todd Clarke, the managing director of NorthStar Financial Services Group, discussed the demands of advisor clients as they evaluate the increasing number of available tech options.

An edited transcript of the interview follows.

Does industry consolidation work against an open-architecture approach?
Eric: Kind of, because in some cases they are purchasing or integrating partners, so that certainly does play into it. Our strategy is very different than what Envestnet's strategy is. Envestnet is creating that all-in-one experience. We're creating an open experience — more of an iPhone-like experience.

We don't want to own or create all the apps that go onto the smartphone for our advisors. We want to integrate with those new and innovative apps.

Are people weighing in on which strategy will win — proprietary product portfolio versus open architecture?
Eric: I think that there is a place for both in the marketplace. You are seeing some advisors looking at those all-in-one strategies and being OK with that approach. Obviously we're biased toward our strategy of open architecture and we think that there will be more independent advisors [who are] looking for that.

All the advisors that we serve are fiduciaries. Because of that, they're very independent - they have to keep their clients' best interests in mind. To do that, they feel like they need to find the technology that's the best fit for their business.

How concerned are you that a breach like what happened at Equifax could make its way to an open-architecture platform?
Eric: We're the only provider in our space that has an ISO certification, so we take that very seriously. We have security protocols — not only in the tech stack but also in our operational and operating procedures — clear from the board right down to the line-level staff member to have and maintain that ISO certification. That's a big deal to us, and the amount of data that we have is something that we have to safeguard every day.

So currently we have just over 2 million accounts on our platform that comprise just over $550 billion of assets under administration across some 1,300 advisors. The security and trust that they place in us is of utmost importance to us.

With that being said, we do have a lot of advisors who are doing things to proactively position their clients for a breach, like what happened with Equifax. What I mean by that is they're having their clients sign up for services like LifeLock, where even if their information is breached, then, if somebody were to try and use that information and open a credit account or line of credit or credit card, they would be notified and have an opportunity to say, "no, that's not me that's doing that activity."

What are some of the key offerings they will have to compete on?
Eric: Security is one. I think that, in the future, you're going to see the ISO certification be a standard requirement. That's why we invested the money and time that we did into getting that certification. That's ultimately what drives a lot of our decision-making processes day-to-day, and it's something that we feel should be a standard when firms are looking to do business with us as tech providers.

So there's that, and then there are day-to-day tactical things that we do, like multifactor authentication. If somebody logs in from a new or unknown device associated with that login, then they get a text message — type in these three digits, you know.

Those types of things are becoming more and more commonplace, and so having that type of functionality for our advisors to implement with their clients is a big deal.

What about for the competitors who aren't adopting the open architecture?
Eric: Closed or open doesn't create any additional vulnerabilities. Anyone who connects a device to the internet is vulnerable, whether your architecture is closed or not. Equifax certainly didn't get hacked because they have an API; that's not how people got in to do that hack.

If you look at Sony, their hack could have been prevented by a multifactor authentication. That was just a username and password that was stolen.

There are some very basic things that you can put into place to prevent those types of breaches, but at the same time, it is a top concern.

Are there any offerings being developed to make it tougher for clients to go independent?
Eric: That is going to get announced. We're one of the sponsors and it's kind of a co-op, for lack of a better term, but it's a secure way for us to share our information. There's a major custodian that's a part of that, and about a handful of tech companies that are part of that as well.

It's a technology that, instead of doing point-to-point encrypted sharing of information, it takes a packet of data and disperses it out into, say, 1,000 packets and then brings it back together on the other end. Then each of those packets is encrypted.

Think of it as having a puzzle, then instead of exchanging that puzzle completed across the table, you break it up and bring it back together at the other side.

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Some of the data that we share with each other may be millions and millions of rows of information, and it takes a certain amount of time to share that data. But when you break it into 1,000 pieces and then bring it back together at the other side, that happens in a fraction of the time that it would take you to share one large encrypted file. So it's not only more secure but it's quicker as well.

You're seeing technology being used around security in a way that's not only more secure but the convenience factor is still there.

Have you seen any changes in the demand from clients?
Eric: We're seeing a lot of demand around sharing of information from one advisor to the other. We've spent a lot of time and resources building the integrations across the major systems that our advisors use. Obviously taking that portfolio accounting data, sharing that into a financial planning system or CRM system freely, getting that information flowing both ways - that's part of it.

Advisors have come to us and said, "We want to be able to share — I have a friend of mine in New York who is awesome at creating retirement income portfolios. I want him to be able to put that information into my platform and have it update my accounts."

We created this platform called Orion Communities. Communities helps our advisors share models with each other and only have to update their models in one location but then have 13 other advisors be able to subscribe to that and collaborate. That is a win because it allows our advisors to spend less time on managing the portfolios and more time on growing their business.

Along the way of building that out, we had some unique opportunities come to us. The Communities' infrastructure itself, we don't charge for. We thought that would be disruptive over the investments of the world that are charging 25 to 30 basis points as a platform fee. We thought, let's just build out the infrastructure and then make it available to our advisors.

"We’ve spent a lot of time and resources building the integrations across the major systems that our advisors use."

We also had some outside asset managers come to us and say, "Hey, we want to be part of the community." Todd, do you want to talk a little bit about that?

Todd: Yes. Eric was referring to ... the peer-to-peer sharing of advisory models on to Communities' exchange of knowledge between advisors. That will allow the advisors to have an additional revenue source they can charge for those models.

We had firms like BlackRock and Russell come to us and say, "Look, we'd like to put our proprietary models on Orion Communities so that Orion advisors could access proprietary BlackRock models and Russell models."

We said, "Great, but you have to do it at no additional fee." So they put those proprietary models out there for the advisors to access.

Then our sister firm, CLS Investments, wanted to jump on that bandwagon. Rather than doing proprietary models, CLS went out and met with five ETF issuers — PowerShares, Pimco, Deutsche, JPMorgan and First Trust. They'll assemble models across these ETF issuers, ranging from conservative to aggressive. CLS will post those models on the Communities as well, for no additional strategist fee. It's really kind of a two-pronged approach — peer-to-peer sharing or accessing global asset managers for no additional strategist fee.

Would advisors be able to actually communicate with the individuals who created a model in this instance?
Eric: In some cases. For instance, we have an overlay that we launched about six months ago that allows our advisors to collaborate with each other, called Orion Social. That's a place where our advisors can exchange thoughts and ideas with each other, as well as with our Orion subject matter expert teams. They will certainly be collaborating about the model portfolios and then the strategists, they're offering conference calls and things like that, typically on a weekly basis, doing market updates; those types of things.

How many actual models in Communities now?
Eric: BlackRock has provided a couple dozen models, same with Russell, and on the CLS side there's about eight models — and then our advisor. The peer-to-peer sharing opened up on Nov. 1.

Todd: In theory, all 1,300 advisors could offer multiple models. That probably won't happen, but it is going to be available for anyone that wants to post a model.

Eric: We've built out some filtering functionality. We've envisioned that there will be a lot of models out there ... so we're allowing some filtering functionality for advisors to narrow the models that they're reviewing.

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