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Pete Giza and Damon Deru go for Holy Grail of portfolio rebalancing with software that shuffles stocks, bonds... and asset classes; Believe it?

The RedBlack and TradeWarrior executives see old systems as 'archaic' yet know that the Black Diamonds, Morningstars, Orions and Tamaracs see rebalancing as a loss leader

Tuesday, June 11, 2019 – 9:49 PM by Oisin Breen
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Pete Giza: You look at any portfolio accounting management system today, it’s archaic. I don’t care which one you choose ... [They're] being left in the cosmic dust.

Brooke's Note: The rebalancing software category was the hottest a few years ago, but then, suddenly, it went dead. That happens when all the players swear holy matrimony to larger companies. So it's a contrarian move for Peter Giza and Damon Deru to make a ruckus just when everyone else is settling into quiet symbiosis. Their swagger is refreshing and the combination of experience and a fresh start holds promise--especially because, they say, rebalancing never achieved its real destiny. There was so much labor-saving to be accomplished just with basic tools, the pressure wasn't there to go beyond basic. Skeptics say new entrants will say just about anything under the ether of a start-up rush and that we need not rush to proclaim Giza and Deru as the next coming. Non-skeptics say there are signs these guys are almost certainly doing some things well -- even the basics -- that could heat up a lukewarm business.

Pete Giza and Damon Deru are back in the rebalancing game with a vengeance, with a plan for a new type of AI-driven software that not only looks at how stocks and bonds are allocated, but also at asset classes -- the holy grail of rebalancing no one else is doing.

Dermot O'Mahony
Dermot O'Mahony: I've seen start-ups make outlandish claims [before] to garner free media attention.

But they'll be flying in the face of strong headwinds. The self-funded firm is financially outgunned; the business has been commoditized, and the market is crowded. It's also very much in the control of five giants -- one of which, TD Ameritrade, gives away its iRebal rebalancer for free.

What's more, their business proposition is drawing skepticism and guffaws from competitors. 

“I’ve seen start-ups make outlandish claims [before] to garner free media attention," says Morningstar's senior vice president and global head of software, Dermot O'Mahony, via email.

The suggestion that cloud native could make advisors, regardless of what software they're using, into rebalancing cyborgs with computer-assisted brains may be a little far-fetched, adds Rasheed Hammouda, CEO and co-founder of Chicago-based portfolio management vendor, Bridge Financial Technology, via email.

"Some platforms have teased this with the rise of AI, but almost always from the example of 'built-in analytics to get better returns!' I don't really buy that, [and] haven't seen compelling proof that this can be done," he says, emphasizing, however, that he's referring to the general concept, rather than AdvisorPeak specifically.

Heady boast

Nonetheless, Deru launched AdvisorPeak last year and quickly signed up Giza. They claim on their website that the software sets a "new industry standard" for rebalancing, based on "the most powerful, yet intuitive way to manage client portfolios." 

Michael Kitces
Michael Kitces: 'There's still ample room for new companies to compete ... [so] I do see opportunity.'

That's a heady boast, but they insist they can back it up. 

“We're making bold claims ... that might be viewed [as] that 'new start-up making noise' ... [but] we didn't join forces to create yet another trading rebalancing system," Giza says.

But Giza acknowledges the firm's software is still a work in progress.

"In our current product you have to go too far to get some things, so we're ... scrubbing everything," he says. "Our core engine is extremely solid ... we're thinking about [rebalancing] in a completely different way."

Long-standing industry commentator Bob Veres, says their idea is more than pie-in-the-sky thinking.

"If you’ve been waiting to take advantage of a sophisticated trading, rebalancing, tax-loss-harvesting software program ... the wait may be over," he writes in his blog.

Veres highlights AdvisorPeak's "smart trade recommendations" as one standout feature. See: Vestmark calls out Envestnet as it makes 'easy-button' purchase of a $3.3-billion RIA asset magnet with hopes for a spot alongside the Chicago giant -- and Orion and SS&C.

Philosophical rebalancing

Indeed Deru says one reason he chose to launch his firm is that current market players just haven't set the bar that high. Existing rebalancing software, he explains, is little more than a database with a graphic overlay.

Damon Deru
Damon Deru: The departure [from TradeWarrior] became a catalyst ... Every day I just wake up ecstatic.

The big software firms like Tamarac, Morningstar, Orion and Black Diamond are focused foremost on performance-reporting software or RIA custody, he explains.

“Look at any portfolio accounting management system today, [they're] archaic," says Giza, now AdvisorPeak's chief product officer. "I don’t care which one you choose ... [Rebalancers] are being left in the cosmic dust."

The leap forward in AdvisorPeak software can be explained as a move from a quantitative to qualitative balancing. In other words, the software is smart enough to know that what is balanced on a superficial level -- from bond to stock -- is also balanced at the philosophical level by asset class. 

This could very well be compelling, says Hammouda. "Helping [advisors] see asset class equivalency in securities is a big example of an efficiency in my mind that ought to be gained."

That said, there is danger the new software will be ahead of the demand curve.

"It will be of interest to some, but not all that many," says Joel Bruckenstein, founder of the T3 conferences, via email. Most advisors won't need, or want, the kind of fine-grain analysis that a rebalancer of investment philosophy provides, he says.

T3 Data
T3 Data on overall rebalancing marketshare. The data is based on penetration of the total potential market, with just 34% of advisors using a rebalancer, according to T3. (click to enlarge)

But Hammouda says AdvisorPeak already has two major feathers in its cap, namely its user interface and its trading tools, both of which are top notch.

What the naysayers are missing is the fact that it's offering a 60-day evaluation period. That is a huge crucible, meaning everything has to be in tip-top shape, he explains.

"They're seriously putting their money where their mouth is [by] letting their product stand that sort of test."

There's certainly opportunity, agrees Michael Kitces, founder of the Bozeman, Mont.-based XY Planning Network, and author of the popular Nerd's Eye View blog, via email.

"Absolute adoption is low, [and] lots of advisors don't use [rebalancers], which means there's still ample room for new companies to compete," he explains. "[AdvisorPeak] can try to win with a more modern, superior feature set ... I do see opportunity."

Just 34% of advisors currently use rebalancing software, according to T3 data.

Slogging it out

Despite the naysayers, AdvisorPeak has been steadily adding clients since it hit the open market six months ago.

Joel Bruckenstein
Joel Bruckenstein: It will be of interest to some, but not all that many ... the devil is in the details.

Between Dec. 2018 and this May, it averaged 16 new clients a month, including solo practices, "multi-billion dollar" RIAs, broker-dealers and banks, according to the firm. Its total client count now stands at 100. Deru, however, declines to reveal the value of the assets under its administration.

Deru and Giza's previous stints in the rebalancing software vanguard aided this auspicious start. The bulk -- 80% of AdvisorPeak's clients -- are former users of TradeWarrior, which Deru launched in 2008 and RedBlack, which Giza co-founded in 2006.

Along with Giza, who joined AdvisorPeak last November, Deru has hired a slew of old, RIA software hands to give himself a fighting chance, bumping the firm's headcount to 15. See: Downmarket Redtail hustles at 'crazy pace' to steal march upmarket as CRM rival Junxure wires merger and Salesforce relaunches as an off-the-rack product.

These include Tim Minert, an ex-RedTail executive who joined in Nov. 2018, and at least three former TradeWarrior staffers, including chief technology officer Darren Collins (Feb. 2019); chief operating officer Ryann Ramos (Nov. 2018); and vice president for client relationships, Patrick Keel (Nov. 2018).

It's a good start, but they're facing a slog going forward, says Bruckenstein.

“If you're with a firm like Orion for portfolio management and accounting, the path of least resistance is to use the same firm for rebalancing,” he explains. See: T3 takes Vegas again in the year of 'delivery,' but it's not all about software arriving at the RIA doorstep through chief delivery men and women.

Of the leading players, Omaha, Neb.-based TD bought iRebal in 2007, Chicago-based Envestnet acquired rebalancer Tamarac in 2012 and Morningstar acquired tRx in 2015.

In addition, Black Diamond just revamped its own system last year, and Orion launched its proprietary software, Eclipse, in Feb. 2017. See: Jud Bergman remakes Envestnet into two units and Bill Crager and Stuart DePina will head them as Anil Arora exits.

No Sweat

At least for the moment, none of those players are sweating AdviserPeak's incursion into the market, even if innovation has ground to a standstill. After all, the big five have cornered roughly 84.4%* of the existing rebalancing market, according to a 2019 software survey and other data.

Bob Veres
Bob Veres: [It] costs more than $50,000 a year for the market leaders ... AdvisorPeak is a relative bargain.

The market they launched AdvisorPeak to address simply doesn't exist, rivals say. 

Indeed, both Morningstar and Eric Clarke, CEO of Omaha, Neb.-based Orion, reject the premise that there's been little to no innovation in rebalancing software over the past decade. See: Orion's Eric Clarke tests new strategy to combat Envestnet's Jud Bergman in a Game of Thrones style clash for keys to RIA and IBD kingdoms.

There's been a literal ton, says Sheryl Rowling, Morningstar's head of rebalancing, via email. See: How Joe Mansueto's CEO hand-off to Kunal Kapoor could be more than a succession play for Morningstar.

"From a rebalancing industry standpoint over the last ten years, innovations include: trading, model marketplaces, and the ability to rebalance at the household level," she explains.

Rowling provided RIABiz with 14 tRx-specific innovations, including automated location optimization; tax gain harvesting; asset class rebalancing; and capital gains distribution avoidance.

Giza accepts two of Morningstar's claims, dismisses four as category errors, and asserts eight are more than 10 years old. See: Building a robo for RIAs with (maybe) no robo baggage, 55ip sizzles with hires as it makes Matt Abar a partner and strives to make 'risk' a for-profit four-letter word.

Price wars

 Veres, however, asserts on his blog that AdvisorPeak has a clear opening to compete on: price. See: Joel Bruckenstein and Bob Veres part ways to do their own conferences.

Tim Minert
Tim Minert is AdvisorPeak's chief reveneue officer for trading and rebalancing.

“[It] costs more than $50,000 a year for the market leaders' [software] -- a cost which makes hand-trading seem less expensive in comparison,” Veres writes.

“AdvisorPeak is a relative bargain."

Veres notes that for advisors with $25 million to $100 million, AdvisorPeak costs $7,188 a year; for those with between $100 million and $250 million, this figure climbs to $10,788; and those with $250 million to $500 million pay $16,788. Thereafter, pricing is agreed on a case-by-case basis.

 After the 60-day trial, clients can sign a one-year minimum contract, with no set-up or training fees, Deru says. 

John Mackowiak
John Mackowiak: Pricing is certainly a consideration, but the feature set and value provided outweigh price for many firms.

But this doesn't mean AdvisorPeak will start hoovering up price conscious RIAs, says John Mackowiak, chief business development officer at Advyzon, via email.

Advyzon, another Chicago-based software vendor, integrated with AdvisorPeak earlier this year. See: SS&C overlords culturally shock Black Diamond RIAs in Chicago with heaviness and wow them with well-funded competency.

It's mostly the larger firms that want the multi-custodial bells and whistles you get with Orion et al., so price isn't a major issue," he explains. "It's] a consideration, but the feature set and value provided outweigh price for many firms."

Just wait, Giza says.

“[Whether] you’ve got $5 million under management or if you’ve got $50 billion .... When you see what we release, you’ll sit back and go 'wow!' If that doesn’t happen, then I’ve failed.” he adds.

Maybe so, but AdvisorPeak faces another price dilemma. How do you compete with free? 

Although AdvisorPeak undercuts Orion and others on price, the second most popular rebalancing software is the free. iRebal has a 24.7% marketshare. See: Schwab PortfolioCenter sale to Envestnet signals open season on 2,300 RIAs in the deal; Orion bags six; 'Why didn't Tamarac call me?' some ask.

iRebal does quite “enough to get the job done," says a financial technology source.

“It’s nowhere near as sophisticated as Orion’s [Eclipse] but it doesn’t need to be. The people using it have mostly mutual funds and ETFs, and they’re happy with simple [rebalancing] rules," the source states.

The various marketshare figures used in this article are based on those provided in the T3 Technology Survey 2019, although they are extrapolated to match the current addressable market for rebalancing software -- just 34% of the potential market, according to T3 data -- rather than directly imported.

Including the potential market of firms who did not state that they used a rebalancer, Tamarac has 9.86% marketshare; iRebal 8.44%; Orion 5.48%; Black Diamond 3.25%; Morningstar 1.85%; Oranj/TradeWarrior 1.23%; and RedBlack 0.73%. Accepting the commonly used figure of 17,000 RIAs overall, AdvisorPeak's 100 clients put its marketshare at 0.5% of the potential market, and 1.73% of the current addressable market.

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Mentioned in this article:

Morningstar, Inc.
Top Executive: Joe Mansueto

RedBlack Software
Top Executive: Daniel Potter

Sheryl Rowling

Sheryl Rowling

June 12, 2019 — 7:41 AM
Substance should always win over a new entry spouting promises and taking untrue shots at their established competition. A.I. driven rebalance methodology sounds nice, but it's all math and logic any way you look at it. I'll take tax efficient, easy to use and customizeable any day of the week. Add in an affordable price point and full integration - with ongoing enhancements - and you have Morningstar TRX. As for Pete Giza's rebuttal toTRX rebalancing innovations, it would be difficult to say that most features are "over 10 years old." Ten years ago, TRX was an early stage desktop software! Since TRX'S acquisition by Morningstar, here is a sampling of new innovations introduced: Functionality: Automated Rebalancing - Rebalance if Class or SubClass OOB greater than X%. Mutual Fund trade rounding. Equivalencies - splits a trade up among more than one Symbol at specified allocation. Models of Models Integrations: Morningstar intra-day prices for Equity/ETF trading. Morningstar SAL reports - Click on a Ticker Symbol in TRX to view the reports. OOB/TLH/CASH daily email notifications(Morningstar Office users only). Schwab direct trading with Advisor Center. Fix Flyer direct trading - over 20 major custodians. "Shadow" cost basis - importing trade lot data from custodians rather than relying on PAS trade lots which may be incorrect. Morningstar Model Marketplace. Asset manager provided models for use in rebalancing. User experience: We have simplified the process to do Security level models and single account rebalancing. Interface revamp consistent with other Morningstar products. Morningstar API library - example are the Actual vs Target graphs on Model Compliance screen. I'm proud of TRX and what it is today. For a new "work in process" entry to claim that innovation has "ground to a standstill" is blatantly untrue. TRX is one example. One can also look at iRebal's cloud offering, Orion's new Eclipse program, and other rebalancers (Black Diamond, Blaze, etc.) that continue to improve their solutions on an ongoing basis. I caution advisors to always look at the substance.
Brian Murphy

Brian Murphy

June 12, 2019 — 3:48 AM
I'm on the side of cheering for AdvisorPeak. There's a lot to be done not only in the re-balancing space, but more generally in the broader tools space. Speaking w/ Pete it looks to me that they've got the approach right with an eye on a larger prize. I for one am quite interested in seeing how this evolves. Good luck and keep moving guys!

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