RIAs are mad for fixed-income ETFs but a start-up's backers bet $10 million it can get them to pay $10,000 (per seat!) to go back in-house

Imagine if RIAs could finally supplant traditionally clunky micro-bond exchanges with a big smooth-flowing virtual one that also doubles yields without ramping up risk.

YieldX claims its new digital, end-to-end platform for fixed-income investing can do just that, and it has raised $5 million in fresh angel funding to make it happen -- even if its $10,000 entry fee may be off-putting to small firms. 

The company has not disclosed its early investors, beyond stating that its latest round was led by Gilles Gade, founder and CEO of Cross River Bank. It also declined to provide the names of clients, but Steve Gross, the Miami firm's co-founder, president and chief innovation officer, says the firm is onto something big.

"The whole fixed-income [space] is very closed; the products are closed. There are no platforms focused on targeting yield, targeting risk ... across fixed-income," he says.

"We're reimagining the whole thing from end-to-end."

Gross, a founder of quantitative asset manager AlphaParity, and Adam Green, co-founder of neo-bank and financial management app MoneyLion, founded YieldX in April and launched its fixed-income software, Sept. 15.

The company claims its software quickly sifts through a database of over one million individual bonds, filters them according to yield, risk, liquidity, maturity and expense ratios, then compiles them into a customizable portfolio of individual bonds that advisors can trade.

There's certainly demand, Dennis Gallant, senior analyst at Boston-based consultancy the Aite Group, told Citywire.

"Advisors [want] cleaner, faster, more integrated and less costly access to fixed-income solutions," he said.

Biting the hand

The irony is that without the rise of fixed-income ETFs, which got many RIAs to outsource what they previously did in-house, software like YieldX couldn't exist.  ETFs, unlike mutual funds or private portfolios, provide easy access to data,

ETFs created the data needed to fuel a virtual model, says Tom Bradley, head of YieldX's fixed-income unit.

"The explosion in ETFs has driven a dramatic increase in electronic trading and liquidity. By default, [it] created a ton more data on individual bonds ... and that's allowed us to rebuild the model."

There's a second irony too, namely the sheer scale of the trading operations in place at mega-vendors like Vanguard and BlackRock. They have driven down the price of fixed-income data so much individual advisors can build competitive bond ladders, according to Gross.

"ETFs have changed fixed income investing forever," he says.

"It is now much easier and cheaper to get exposure to different types of fixed income ... [and] the quality of pricing and liquidity data is infinitely better than it was two years ago, and before that, it was almost non-existent or extremely expensive."

Electric avenue

YieldX gathers its bond data from a dozen unnamed vendors. Its risk analytics was built in-house, and it executes its trades through Dallas-based RIA custodian Apex Clearing, and larger trades through wirehouse trading desks.

At the moment, YieldX only connects directly to Apex. But the start-up is in integration talks with 12 firms, including the three major RIA custodians, and a number of financial technology firms.

Until that happens, most advisors will still have to use YieldX to copy a portfolio into a file that can be uploaded into their custodian's trading software.

Currently, advisors who want to digitally control client bond portfolios tend to use software like Tradeweb Markets, Bloomberg, MarketAxess, and Bond Point.

But none matches YieldX for functionality, says Gross.

"You can go and use 30-year-old software ... and have a little bit of liquidity, not a lot, [where it's] not easy to build portfolios, [and there's] no customer experience whatsoever.  We're bringing the new age of technology to the markets in fixed-income."

Neither TradeWeb nor Bond Point-owner ICE provided a response, despite a brief correspondence. Bloomberg and MarketAxess also did not respond to a request for comment.

The majority of the vast global bond market also remains wedded to an old-fashioned model of traders at desks buying and selling over the phone, which means YieldX can only provide advisors access to a fraction of the overall bond market -- a problem also faced by longer-established rivals.

Just 34.4% of investment-grade corporate bonds and 11% of high-yield corporate bonds trade electronically, according to the Wall Street Journal.

Overall, approximately 30% of all fixed-income trades are reported, tracked, and managed digitally. See: Into the PIMCO void, Vanguard re-applies itself to active fixed-income funds.

Steep price

Smaller firms could balk too at paying the flat license fee of $800 plus its per advisor charge of $10,000.

That said, the firm offers discounts for solo RIAs in exchange for quarterly feedback on the software,

It's rate card price is certainly too steep for small RIAs, according to Brett Fry, an advisor at two-man $112.9 million AUM RIA Forteris Wealth Management in Dallas. 

The software would have to help bring in up to $10 million in new assets each year to justify its expense, Fry told WealthManagement.com.

"Our go-to-market strategy is focused on enterprise clients, including RIA networks, large broker-dealers, private wealth groups and financial technology firms," Gross acknowledges. 

But he says Fry's estimate for smaller firms is off by a factor of ten. 

"[For] smaller, single-user RIAs, a $10,000 fee is 1% of $1 million, [so] even $1 million dollars of AUM at the standard 1% fee ... pays for itself."

Shaving points

The software shaves basis points off RIA revenues but cuts costs elsewhere and gives firms a 'gotcha' that could win big-time assets, according to Gross.

"Stable-income" and "yield-income" portfolios could yield up to 1.5% and 2.4%, respectively, compared with 0.58% and 0.95% through ETF portfolios, "for even less risk and expense," Gross explains. 

"It takes less than a minute to do this analysis on [YieldX] and clearly shows clients the value."

If you want to match, say, an iShares corporate bond ETF like LQD, you can pull in the same yield, with less risk and at half the price, says  Bradley.

With individual bonds, advisers can be more specific, more reliable and add value to suit your client more accurately, he continues. "It's very powerful for an RIA."

Down in the dumps

No amount of bond sifting will completely save an RIA from the abysmal income produced by fixed-income securities in 2020, however.

Today, yields are as low as 0.09% on a three-month bond. That figure inches to 1.59% on a 30-year bond, according to Bloomberg data.

The Federal Reserve's benchmark interest rate has remained at rock bottom, between 0% and 0.25%, since a COVID-19 emergency rate cut in February. See: Phones at RIA cash managers 'ring off the hook' amid yield crunch.

Even fixed-income stalwarts like Fidelity Investments, the Vanguard Group, Federated Hermes, and BNY Mellon's Dreyfus funds have taken a hit. Each has closed various money-market funds. See: Fidelity Investments intends to 'hard close' two institutional money market funds to curb exposure to COVID-19's high-volatility market.

Several more firms, including BlackRock, have been forced to turn to fee-waivers to prop up select funds. See: Vanguard's shuttering of municipal money market funds sends clarion call to RIAs.

Despite -- or maybe because of -- such headwinds, Gross argues that RIAs should bring bond-trading back in-house, rather than outsource it to ETF vendors. The fees for outsourcing represent too large a portion of the payout, he asserts.

"With yields so low, it makes our capabilities a 'must-have' rather than a 'nice to have' [because] one of the biggest problems facing RIAs is fixed-income and cash make a very large portion of the average firm's AUM. [But] with yields at these levels, they just don’t justify the fees the advisor charges. To maintain fees, advisors must show the value they add."

"You can do a much much better job than just putting a core ETF into your [client's] portfolio and paying 30- or 40-basis-points for that ... It's a little bit lazy," he adds.

Swift flight

YieldX's launch has been swift, beginning with an initial $5 million round at the firm's April 2019 inception. It raised a second, $5 million round in August followed by its latest raise at the end of a five-month pilot period.

Beyond Gade, its investors include unnamed financial technology, banking, venture capital, and asset management executives, acording to the firm.

A 20-strong mix of RIAs, asset managers, broker-dealers and investments banks used its bond-search, portfolio-creation and trading tools to debug the software.

This pilot stage included at least one small RIA, with one advisor, and assets under management between $100 million and $200 million. YieldX has yet to answer whether pilot users paid for the privilege.

Prior to starting YieldX, Gross founded AlphaParity, which he sold in Feb. 2017 to Franklin Templeton. He stayed on at the New York-based asset manager until Mar. 2019.

During his time at Franklin, Gross met former Citadel investment banker Green, now YieldX CEO. Green left MoneyLion in Apr. 2019.

The pair is joined by several fixed-income experts, including Bradley, a UBS fixed income alum and Bryan McKelvey, a former lead of BlackRock's Aladdin Wealth in Asia, now YieldX head of engineering.

They're joined by Mark Lam, YieldX director of quantitative research, who spent just under seven years running Aladdin's asset analytics team and Stacey Shapiro, chief of staff and marketing director.

Overall, YieldX employs 20 people, three of whom joined the firm in the past month. It will hire an undisclosed number of data analysts, software engineers, and sales staff in the coming months, the company said.