The $800-billion Atlanta money manager is trying a modern model portfolios play on buying distribution for a more prominent seat at the table

January 13, 2016 — 9:39 PM UTC by Lisa Shidler

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Brooke’s Note: If there is an RIA’s robo, it’s Jemstep. Kevin Cimring and Simon Roy never hedged their bets — it was RIA all the way in terms of putting the RIA in the driver’s seat of investing and also solving big RIA pain points like onboarding. Cimring partnered strictly with RIA partners like TD Ameritrade Institutional and Orion Advisor Services. RIAs like Ajay Gupta and Steve Lockshin endorse the effort. That Invesco suddenly owns Jemstep is a bit of a shock to the system. Jemstep has been quite pure. Asset managers see the world differently and so the Invesco purchase makes the future of Jemstep cloudy. Still, with the battlefield littered with insurance companies, Schorsches and others who overreached in buying distribution, Invesco has a chance to rewrite the script. The nitty gritty is a ways down in this article but the parties to this deal give solid lip service to the perils involved in such a deal.

One of the giants of the asset management manufacturing field is seeking to increase distribution of products the old fashioned way — by purchasing a distributor. The new twist for Invesco Ltd. of Atlanta is the novel distribution agent it has chosen to subsume — a fledgling robo-advisor that has curried special favor with RIAs. See: Jemstep swipes the spotlight at T3 Enterprise Conference in Atlanta.

Invesco announced Tuesday that it is buying Jemstep Inc. of Los Altos, Calif. for an undisclosed sum and the promise of increased funding to build out the offering — specifically for larger institutions like banks, big independent broker-dealers and insurance companies. See: Jemstep swipes the spotlight at T3 Enterprise Conference in Atlanta.

Invesco, which manages $800 billion in assets, will rename the robo-advisor Invesco Jemstep. See: What’s up with Invesco offloading its $20-billion RIA/trust firm to a Canadian bank — and at a bargain price?.

What asset managers want

Simon Roy: If you try to close the platform, it will fail. Invesco gets that. Simon Roy: If you try to
close the platform, it will fail.
Invesco gets that.

Asset managers rarely bother to buy distribution nowadays because it tends to end in tears as advisors rebel against being herded into certain products. While It’s only natural for an asset manager to want to grow assets, it’s equally natural for advisors to balk when they perceive managers trying to stuff proprietary products down their throats.

It’s a syndrome that’s all too apparent in this new combination, according to Alois Pirker, an analyst with Aite Group in Boston.

“When an asset manager comes to the table, one would think they would position their own products. For more agnostic advisors, this may be troubling. If you’re an asset manager, your agenda is pretty clear, you want more assets.”

Many observers presumed distribution was BlackRock’s agenda when it purchased FutureAdvisor for $152 million in August. See: Why BlackRock’s purchase of FutureAdvisor for $152 million could be a deal of destiny.

And, to a lesser extent, that was also the case earlier in 2015 when Fidelity Investments purchased eMoney Advisor, reportedly for $250 million, and in April when Northwestern Mutual reportedly spent $250 million to buy LearnVest Inc. See: What the collective unconscious of RIAs in 2015 revealed as crunched by RIABiz article readership.

A significant difference between Jemstep and virtually all other players is that it does not automate the management of portfolios. It is beloved for is having a smooth, do-it-yourself onboarding system. Even the owners of Betterment Institutional are publicly big fans of Jemstep. See: Why exactly Betterment backers Marty Bicknell and Steve Lockshin became customers of rival robo and custodian TD Ameritrade.

Open for business

This intentional void of investment product filler at Jemstep may prove tempting to an asset manager like Invesco. But Peter Intraligi, head of the North American distribution channel for Invesco, insists his firm will tread lightly in this regard and he expresses disdain for a for a menu of options that includes only one asset manager.

“Imagine you travel across the country and at every restaurant you have the same menu items to choose from,” he says, adding: “This is completely open architecture.” See: With robo-advisors on the rise, robo custodian Apex is rising with them, a diamond mined from the rubble of the Penson Worldwide debacle.

Simon Roy, co-founder and president of Jemstep, echoes the sentiment: “If you try to close the platform, it will fail. Invesco gets that.”

Yet the theory of open architecture and the reality of a level playing field often conflict. Sources say Invesco wouldn’t pay tens of millions or hundreds of millions to buy Jemstep were it not wagering that it could put tens or hundreds of millions of fresh RIA assets into its funds. See: What’s up with Invesco offloading its $20-billion RIA/trust firm to a Canadian bank — and at a bargain price?.

Certainly, Invesco is still betting that it can get RIAs to up their usage of Invesco products.

On the whole, Will Trout, an analyst with Celent in Houston, in an email.sees Invesco’s relationship with Jemstep as a big boost for the asset manager.

“Asset managers like Invesco — and particularly those asset managers focused on ETFs — are keen on improving distribution and reversing the erosion of pricing power because of their distance from retail investors which has given them something of a tin ear for investor needs.” See: RIAs surpass wirehouses in ETF asset distribution and it’ll mean change.

Invesco owns PowerShares, which produces the QQQ Nasdaq ETF — a staple of many portfolios.

Get it for you wholesale

Roy, who will stay on as president along with Kevin Cimring as CEO, says one way this will happen is by baking Invesco mutual funds and ETFs into the Invesco Jemstep model portfolios that consumers choose wholesale rather than fund by fund. Roy concedes that there will be model portfolios made up of Invesco options. See: Orion and Jemstep form first big marriage of non-robo and robo software — at advisor behest — to create RIA e-commerce.

But advisors who instead choose prefabricated portfolios may find plenty of Invesco products therein, says Roy.

“Ultimately, advisors get to decide passive, active, ETFs or mutual funds. We hope to earn the opportunity to have some of Invesco products included.”

Roy says that Jemstep has made limited use of model portfolios in the past.

TAMP-like offering

Tim Welsh: Robo-advisors are now becoming a new distribution channel for the big asset managers like BlackRock, Vanguard, Schwab and now Invesco. Tim Welsh: Robo-advisors are now becoming
a new distribution channel for the
big asset managers like BlackRock, Vanguard,
Schwab and now Invesco.

But though Invesco may gain leverage in distributing its products, it is also working — DFA-style — to become a bigger part of the real downstream distributors — RIAs or other advisors.

Invesco, by dint of purchasing retail asset manager Van Kampen from Morgan Stanley in 2009, has 12 consultants who will use Jemstep as part of their arsenal for modernizing advisory practices. These consultants don’t do onsite consulting in the traditional sense but set up workshops for advisors to attend. See: What’s up with Invesco offloading its $20-billion RIA/trust firm to a Canadian bank — and at a bargain price?.

Roy says that RIAs have come to view Jemstep almost as an ad-hoc, in-house TAMP and believes that will be an appealing dimension to the newly formed Invesco Jemstep. The new entity will offer TAMP-like bundles comprised of Invesco products as one option for advisors.

“It’s not the case that the only options will be Invesco-only set of portfolios. It’ll be introduced among a set of options. Those will be an options available to advisory firms to decide if they want to offer those options or not,” Roy explains.

“What I’m essentially saying is many of these firms are looking for a set of models whether they can trade them in-house or through a TAMP. We essentially support both models. It’s not about Invesco looking to set up a TAMP but Jemstep can support firms that use in-house models or who use a TAMP. See: What exactly are robo-advisors, why did they steal the 2014 show and what will a 2015 repeat take?.

TD factor

Another unknown on the horizon: Will advisors warm to the custodian that comes along with Jemstep — Jersey City, N.J.-based TD Ameritrade?

“One problem I do see for Invesco is the issue of custody, as the RIA or the end client may not want to be tied to the custodian of the robo-advisor,” writes Trout. See: Orion and Jemstep form first big marriage of non-robo and robo software — at advisor behest — to create RIA e-commerce.

Roy acknowledges that to woo more advisors via Invesco, his firm needs — and will take on — additional custodians, although he declined to make any specific announcements on that score.

Jemstep also provides assistance to independent broker-dealers. Roy is staying on at Invesco Jemstep, which will be managed as a separate subsidiary of Invesco.

PE or sell

On the Jemstep side of the equation, Trout speculates that despite the robo’s relationship with Orion Advisor Services, LLC, it still needed a bigger partner to supply cash. See: Orion and Jemstep form first big marriage of non-robo and robo software — at advisor behest — to create RIA e-commerce.

“Despite some successes in part due to its partnership with Orion it is burning cash and under pressure. Furthermore, despite all the positives around Jemstep’s capabilities — the slick onboarding process and above all, robust data aggregation, which helps advisors provide more holistic advice — and charge for it — to clients …. you cannot disguise the fact that the use of digital distribution by real-life advisors is a model largely untested,” Trout says.

Roy responds that although his firm was doing quite well, additional funding would be an issue down the road. He cites the need to serve big firms. One big firm sources say may be considering Jemstep is LPL which has not yet disclosed its choice. See: LPL will launch third-party robo for advisors and eliminate some fees.

“For Jemstep, things were going really well and quite frankly, we were swamped. The choice we faced was more private-equity or do we partner with a firm where the cultures and interests are aligned,” he says. See: Now come the robo-alts firms — a full flock of 'em as unwavering as the robo-advisors.

What next?

Jasen Yang: This is a signal that financial services providers still have hard time renting a key piece of the customer relationship. Jasen Yang: This is a signal
that financial services providers still have
hard time renting a key piece
of the customer relationship.

Jemstep won’t be the last robo to be snapped up by asset managers, says Tim Welsh of Nexus Strategy.

“Robo-advisors are now becoming a new distribution channel for the big asset managers like BlackRock, Vanguard, Schwab and now Invesco. Look for other asset managers becoming forced to do another deal — maybe Betterment? Wealthfront? — or build their own to maintain their competitive standing,” he says.

“The other aspect of this that is interesting is that Invesco is focusing on advisors and advisor technology platforms, while the others — Schwab, BlackRock and Vanguard are going direct to consumers, mostly. See: Why BlackRock’s purchase of FutureAdvisor for $152 million could be a deal of destiny. The Jemstep platform is customized for advisors and will be a powerful value-add to Invesco.”

Indeed, the flurry of deals in this space shows appetite and interest for robo solutions, says Jasen Yang, CEO of Polly Portfolio Inc. in an email.

“I think large financial institutions are learning to look at startups as outsourced innovation, and rightfully so,” he says. “All financial institutions need modern digital customer service. Jemstep’s original business model was to provide an alternative to the build vs. buy debate: rent. But I think this is a signal that financial services providers still have hard time renting a key piece of the customer relationship.”

Invesco’s progress

Invesco was founded in 1978 when Citizens & Southern National Bank divested its money management operations. The firm has built itself up purchasing other firms along the way, including buying ETF PowerShares Capital Management. But the firm in 2004 got hit with a $450 million settlement with the Attorneys General of New York, Colorado and the SEC after allegations of improper trading practices. See: Amid papal euphoria, a bullish ETF event at NYC’s Conrad Hotel where pros plot the next few trillion of assets.

In 2005, Martin Flanagan became CEO and under his tenure, the firm got back to making profits again. In 2013, Invesco sold Atlantic Trust Private Wealth Management for $210 million to the Canadian Imperial Bank of Commerce, Canada’s fifth-largest bank. See: What’s up with Invesco offloading its $20-billion RIA/trust firm to a Canadian bank — and at a bargain price?.


Mentioned in this article:

Aite Group
Consulting Firm
Top Executive: Frank Rizza

TD Ameritrade
Asset Custodian
Top Executive: Tom Nally



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Stephen Winks said:

January 14, 2016 — 11:17 PM UTC

Jemstep makes “individualized advice” possible for Invesco which is constrained by prospectus from being client specific. It is a brilliant strategy which empowers wholesalers in very powerful ways which are client specific outside the reach of conventional mutual fund companies. There are limitless applications which can enhance the proficiencies of advisors in rendering advice resolving the inherent conflicts of b/ds supporting brokers in rendering advice (incurring fiduciary liability). The support of fiduciary duty may be more easily achieved by Jemstep/Invesco than by b/ds whose compliance protocol do not acknowledge their brokers render advice. Jemstep/Invesco can illustrate how a recommendation impacts all a client’s holdings as a whole which is a fiduciary duty and greatly elevates the role and counsel of the broker. Advisory services innovation is taking a different form than anticipated, but in doing so, Invesco wins big. Active management can add value and Invesco can now show how.

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Stephen Winks


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