Buckle Up For Turbulence In Wealthtech

Larry Roth, CEO, Wealth Solutions Report

Like The Broader Tech Industry, Wealthtech Is Under Pressure To Perform More With Less Cash, So Be Wise About Your Tech Stack Partners

Many service firms in wealth management straddle two industries – wealth management, of course, and the industry of their expertise. Marketing solutions providers, compliance consultancies and others marry the skills and techniques of an industrial specialization with wealth management’s needs.

Nowhere is this interconnectedness between industries more apparent than wealthtech – which in many ways is its own Silicon Valley among us. If the tech world sneezes, wealthtech catches a cold. And the tech industry has been on the ropes stretching back to last year, with mass layoffs and streams of money at a low watermark.

While the financing available to tech hasn’t dried entirely, it’s common knowledge that tech loves low interest rates, which doesn’t bode well when the Fed fights inflation. “After more than a decade of low borrowing costs, rising interest rates are forcing tech companies to rethink their strategies, with companies needing to show their profitability over the possibility for growth,” noted The Hill.

Tech Crunch recently reported, “Last year’s techwide reckoning continues. In 2023, layoffs have yet again cost tens of thousands of tech workers their jobs; this time, the workforce reductions have been driven by the biggest names in tech like Google, Amazon, Microsoft, Yahoo, Meta and Zoom. Startups, too, have announced cuts across all sectors, from crypto to enterprise SaaS.”

Under Pressure

Behind the shiny façade of AI, the pressure’s been on wealthtech all year.

Craig Iskowitz, Founder & CEO, Ezra Group

In April, Craig Iskowitz, Founder and CEO of Ezra Group, stated on LinkedIn, “Within the past 30 days, two large software providers, Investcloud and Skience forced out multiple senior leaders in what could be generously described as ‘corporate reboots.’ It’s rare for more than one executive to be let go on the same day, at least in #wealthmanagement. Up until now, this kind of C Suite housecleaning has been reserved for other, more volatile industries.”

Iskowitz continued, “With bad government policies driving the economy off a cliff, company boards of directors have shortened the runway they give to senior leaders to deliver results. They also seem to be much less forgiving of errors in judgment. Last June saw Envestnet conduct a similar sweep when their president, chief product officer and chief client success officer all left in quick succession.”

Snappy Kraken also suffered a round of layoffs reported in March, mirroring the layoffs in the broader tech sector. The layoffs came months after the firm acquired Advisor Websites in May 2022, which doubled its workforce size.

Robert Sofia, Co-Founder & CEO, Snappy Kraken

The firm’s Co-Founder and CEO Robert Sofia told WealthManagement.com, “So you know we acquired Advisor Websites in early 2022. They had about as many employees as we had. So we went from 60 employees to 120 employees basically overnight and when you merge two companies together there’s always going to be redundancies in roles and responsibilities.”

Expressing the gravity of weighing the human cost of layoffs with the needs of the business, Sofia continued, “So we had to make the tough decision to let some people go. It was difficult for the personal aspect but fine for the business. And that’s the priority. We have to take care of our clients and structure the business to be healthy long-term.”

Where To Now?

If the trends of the larger tech industry are any indication, the brunt of the storm may have passed. Business Insider reported a few weeks ago, “Most big tech companies have … halted layoffs, and some have even begun to rehire staff they let go only a few months ago.” The outlet reported that Bernstein Research ended its tech layoffs data series with a declaration to clients that, “The Tech Job Recession is Over.”

Cecile Muñoz, President, U.S. Executive Search & Consulting

That doesn’t necessarily mean we’re out of the woods, though. Private equity and venture capital are heavily invested in wealthtech, and backers aren’t just looking for a favorable tailwind – they’re looking for results – at a time when interest rates are still at their highest since 2007. In other words, we’re still in a mode where shareholders push for demonstrated growth from prior investments rather than from new flows of more expensive money.

After all, inorganic growth through investment is supposed to seed organic growth. As Cecile Muñoz, President of U.S. Executive Search, told RIABiz, “Three years into head-spinning M&A by PE firms, large and mid-size acquirers, individual firms and other unexpected entrants into the highly desired RIA space, the question everyone is asking is, where is the EBITDA growth?”

Coming Out Ahead

Firms that have strong cash flows, are less leveraged and have produced steady organic growth will fare better this year and next while this situation works itself out. And there’s still the possibility that the anticipated recession will come if the Fed overcompensates for inflation, the fragile international situation degrades or some other unforeseen event arises.

If we slip backwards from here, the pressure will increase across wealthtech firms, regardless of who is at the helm. The executives that suffered from the wealthtech shakeout were highly capable professionals and innovative leaders who encountered bad timing and unfortunate economic circumstances.

The good news is that the longer the pressure remains, the more firms will look for cash by driving revenues through organic growth, which can lead to solving some of the functionality issues that I wrote about in March.

Gatekeepers Beware

While failures have been rare and aren’t to be expected to any great extent either in the broader tech arena or in wealthtech, that’s cold comfort to a firm gatekeeper who is left holding the bag after a crucial tech provider either fails or enters a declining feedback loop of cash and quality deficits.

We wear our seatbelts not because we expect to crash, but because of the extreme damage in the unlikely event of a crash. Likewise, gatekeepers carry out due diligence on wealthtech providers to avoid the potentially firm-imploding disaster of a major tech stack failure.

As mentioned above, a firm with solid finances is a better candidate to weather any storm. Some firms may need cash injections to survive, so the gatekeeper should find out how stable a provider’s books would be going forward if they didn’t receive a cent in further investment. Also, find out if they’re growing organically.

If a firm rose to prominence because it had an advantage during the pandemic, like Zoom, learn if it has been successful in pivoting back to normal. You may not need its product as much as you think, or it might not have a solid development plan.

A recent round of layoffs isn’t necessarily a bad sign. In fact, it might be a good sign that management proactively addresses financial and economic pressures.

In addition, unicorns often bring the most innovative changes to our industry, and you can certainly gain a competitive edge with their services, but these are often the most exposed to economic pressure and the need for cash injections, so make sure that you ringfence them in your tech stack just in case they stumble.

A Great Future

Please don’t misunderstand – I am not at all pessimistic about wealthtech. In fact, I’m highly optimistic about all of wealth management, including the technology professionals and firms that enhance our work so tremendously. We have a great future ahead of us, but we must wear our seatbelts.

Larry Roth is CEO of Wealth Solutions Report and Managing Director of RLR Strategic Partners.

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