Billing for Advisers Can Be ‘Smart,’ Too

Advisers need to prepare themselves for an incoming technology-focused financial ecosystem.

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On this episode

“You’re moving from a very slow, archaic world into a fast-moving world. There’s a lot to bridge there.”

Lacey Shrum, CEO of Smart Kx, joins “On Purpose” host Tyrone Ross to discuss the improvements technology can make in the adviser space, starting with the modernization of the billing process. A smarter billing system improves compliance, transparency and transaction speeds. Instead of billing once per quarter, advisers can work according to clients’ needs to bill monthly, weekly or even daily. Working with technology instead of against it will improve the client-adviser relationship.

Advisers need to prepare themselves for an incoming technology-focused financial ecosystem. To meet this future head-on, advisers need to become faster, more flexible and more agile with the growing trends.

The first step: Start building trust in technology wherever applicable, from smart contracts for billing to trading crypto.

This episode was produced, announced and edited by Michele Musso with additional production support from Eleanor Pahl. Our Theme song is Walk with Swag.

Transcript

Tyrone Ross

All right, welcome back to the latest episode of the “On Purpose” podcast. I am your host, Tyrone Ross. I am back with a friend of the show and fellow advocate for financial advisers, Lacey Shrum from Smart Kx. How are you today?

Lacey Shrum

I’m doing so well. Thanks for having me.

Tyrone Ross

Absolutely. This is a long time coming. I just saw you at Riskalyze’s conference, which was awesome. We got to talk for a bit, some of which I’m sure will come up today. Let’s just start with the basics. So, many ways we could take the conversation, but introduce yourself to the people so they know how special you are.

Lacey Shrum

So, my name is Lacey Shrum. I am an attorney. I grew up in the RIA space, the beginning of my career through ops compliance, went to law school, and then did GC and CCO work. I left the RIA and still did compliance consulting, and then got really interested in tech. And, just for lack of better reasoning, just wanted to know how the internet worked. So I took some dev classes, and at that point, just got really into learning about Bitcoin and cryptocurrencies and blockchain technology, still doing consulting, and just this industry is ripe for technology innovation. And, one of the major problems that advisers have is their fee calculations and ensuring that those are accurate, seamlessly and easily. So, that was the reasoning for building my company, Smart Kx, where we automate the fees from the agreement with the client to fee calculation, auditing and then an overall revenue service for advisers.

Tyrone Ross

Awesome. So let’s stay right there. I think that’s one of the things that you always talk about that I think are so important, and which is why when an adviser comes to on ramp, we have one of the first things we have there is a big “post your fee” agreement right here. So, just talk about that, you know, the fees that advisers charge and billing and their agreements, and how most times those really aren’t aligned and how that could present some issues for advisers. And I think it will even more with crypto as we’ve discussed as well.

Lacey Shrum

Absolutely. I think that any adviser that was listening to this probably heard me say fie process, and we’re like, oh, cuz we’re just getting out of the cycle of quarterly in advance right now. And it’s just a headache. Like every adviser, every firm will tell you, “this is one of the most tedious,” you know, “I lose sleep over this at night, because the process is all manual. And I don’t know what I don’t know is in there. Like, I don’t know what the stack of contracts say. But I do know that the SEC is going to ask when they examine me. I do know that when we hit a bad market and clients get upset, they’re going to ask me, does the fee match the client contract?” It sounds very basic. But that’s really hard to maintain. As a firm grows, as the relationship with the client changes, maintaining that symmetry is really difficult. So it’s just this huge pain point for advisers, most advisers are doing some, if not all, of their fee calculation manually. So that means in an Excel formula, they have someone who’s going in and calculating the amount charged and actually paying themselves. So, advisers also have this really odd situation where they are able to calculate their own fee due and pay themselves out of the client’s account with no oversight.

Tyrone Ross

So, great job if you can get it.

Lacey Shrum

Yeah, whenever anybody’s like, oh, there, this bill by AUM is going away. I’m like, “There’s no way it’s going away,” like as a business person. I’m not getting money straight out of the account, I’ll take it. So they have a lot of responsibility. And, and not a lot of oversight. I mean, the SEC will come in and do a look-back. But, that’s two years past when it happened. And so, if you have mistakes, or fraud, or just everyday errors, they can continue on for quite some time. And so, that’s like another piece that I know we’ll talk a lot about. But just this idea of things happening in real time, besides, in contrast to a look-back audit, which I think is really exciting about the technology. But yeah, most are doing it quarterly in advance. Almost all are still billing from client accounts. And then, of course, the quarterly in advance brings up a lot of issues and headaches and a lot of discussion.

Tyrone Ross

Yeah, especially on a volatile asset class. But so yeah, so, so much to dig into there. I guess let’s go through because again, you’ve gone through this, you’ve seen it. So if you could just give us an example of probably the most egregious example that you have seen. There are a lot of advisers now kind of leaning in like “oh my god, am I doing this wrong? What could I do?” And then kind of blend that into how you see a solution, what Smart Kx does to help, and then we could lead advisers to where the pastures are greener and fairer. And we can kind of dig in there.

Lacey Shrum

I think the most egregious, outlandish thing which I haven’t personally seen in my legal work, but you know, it can always happen is fraud. You have these firms who are usually if they’re larger, like trusting a group or one key individual who’s running fees, paying out of a client’s account to the advisers account, which someone has control over. So that’s like, the most egregious. Again, I don’t work with firms where this is happening, I’ve not seen it. But like, that is a risk of this problem that you can pay yourself and you have somebody that is solely in charge, most firms have one key person, it’s usually an operations person that’s doing this whole process, which like, that’s a huge risk. That’s the key man, employee risks that that person could leave. That’s also a lot of stress, a lot of burden for that person there. I know many who are planning vacations and family events and births around the time of billing, but nobody should be doing that. So that’s the most egregious issue there. The other one is, of course, dealing with the SEC, like they can come in, and it’s really easy to put a junior, you know, examiner on this and say compare fees to the client contracts. And it’s really easy to find things that don’t match. Usually the contract isn’t robust enough, the details of what the fee will be, any exceptions, how you’re billed, on what values, where the fee’s coming from, that typically not laid out in the contract, as thorough as it should be. And then over time, advisers changed their relationship, they’ll go to a meeting and say, I met with the Joneses, they are going to park cash here for two months while they buy a house, we’re not going to build them on cash. Well, at that point, that ops person writes it down on a post it note, “not bill on cash, fourth quarter,” when they do billing, they go through all their post it notes, like the documentation, the centralization of like, the whole process is not there. So the SEC can really get into that. And I’ve seen the SEC get down to dollars and cents. That client told you this on this day, you did that on two days later, you owe them for two days difference. Fix it, pay them back. Oh, and by the way, go back and audit every single client and make sure you didn’t do that anywhere else.

Tyrone Ross

Oh my goodness.

Lacey Shrum

Yeah. So that’s why, for those that haven’t heard of our software, the biggest change that we’re really making in the industry is that billing was always this report. So we have performance reports, oh, we also need a billing report. It’s 1% based on AUM, like just run us a report. But that report isn’t. It’s just a flat report. It’s not a system for billing. It’s similar to using Excel to do financials for your startup, instead of using QuickBooks. Like, it’s just very manual, very tedious. And it’s a flat Excel, not a system. And so I went back to the fees, and they said what is the fee calculated on? It’s dependent on the agreement with the client, what you’re going to build and how that’s documented. And it’s on the AUM. So that’s why when we talk about fees a lot, we’ve combined it with the ability to send fee disclosures, fee contracts for signature, we’ve put it with that client contract, because they are dependent on one another. Those of you who are really into the bitcoin space, if you’ve read the Bitcoin white paper, it’s very similar. You have you know, without Bitcoin, you have all these ledgers, and you have people holding them together. And the audit is a mess, and it’s ripe for fraud. Same way with a lot of internal systems, the fees and the contracts are separated, you have a lot of ledgers holding them together, ripe for mistaken fraud. So, we’ve put them together into one.

Tyrone Ross

Awesome. It’s funny, we’re even talking internally where and we’re talking about billing here. But also, why not have this same type of technology or system be used for financial plans, right? You have a plan when advisers should go on the blockchain, right like in the client should own that piece of data and information, and be able to move that where they see fit. Like it’s amazing the technology that’s here we can use but we’re still stuck in the stone age. So let’s talk about billing now. And then just the technology and how it allows financial advisers to, I mean, let’s just call it what it is: become more compliant, right? Talk about being fair, we talked about the decentralization of power and everything in crypto. This is why I think we’re both excited about what this means for our space. And I think one of the things that we’re getting from advisers all the time is, how do I build, right? Because it’s like if you take them away from the little land of AUM, as you mentioned, it’s like where we what do I do now? I can’t just stick a fee on it and wrap it in and go play golf, right? So it’s like there’s so many different models and things that are going to take place here. So, let’s start here. For advisers that are wanting to delve into crypto, what would be the first thing that you say, you know, they should do and start to learn as far as simply as billing is concerned? Because the SEC does want to know, right? They’re saying, like, we want to know what you’re charging on crypto, and how you’re doing it, and all that. But if you can walk folks through that, I think that’ll be incredibly helpful.

Lacey Shrum

Like we’ve talked about, I think there’s a lot of work advisers need to do just not necessarily advisers, as well as just the industry. Our industry is, if you go to any conference, everyone talks about data integration. So how do we get data moving fast between all the service providers, and every month that feels like it’s breaking a little more like we’re getting a little closer, but it is the data that is very closely held, whether intentionally or the lack of technology by the large players. And so, I think that is one piece that stops advisers from implementing any kind of technology, which bitcoin is an asset you’re investing in, but it is a technology, that world is very open, very technologically advanced. So, you’re moving from a very slow, archaic world into a fast-moving world, it’s just, there’s a lot to bridge there. So I think advisers need to understand sort of where they their technology stack stands as a whole, but then their individual practice, and then their internal policies, like what are they are they able to move fast, and I don’t mean fast, like between nine to five on Monday through Friday, like when you look at a crypto allocation or the way of the future, that’s 24/7. And so, like, one of the things that we’ve done is allow advisers, that client-fee relationship will change. And so, the advisers on our platform can change that for your relationship quickly, in compliance, send it out to the client, and it’s done, it takes three minutes versus five to 10 days. And so I think you’ve got to look at your process, like, “Am I ready to jump into these fast moving waters, with billing, with signing contracts, with the way how money moves so quickly?” So, I think that’s really the first piece for advisers to think about if they’ve made that decision. There’s lots of other things I think advisers should think about, I don’t know, I think one of the best things advisers can do right now is if they’re large enough, or if they have somebody on staff who has an interest in technology, and crypto and bitcoin, and also obviously, if they’re on staff, they understand the RIA and the investing world. Just hire somebody to come and research and learn about all the weird things that are out there in crypto, like, I pride myself on being the weirdo of the legal space. And like clients love that, like, it’s good for you, your staff and your investment team to know but like, clients love that. They don’t love talking about ETFs and mutual funds at cocktail parties. Like, I’m sorry, but a portfolio manager from, you know, a big investment company came to speak to the group. It’s been done for a long time. You have some weirdo like all of us Bitcoiners that understand and can talk to clients and just talk about how finance and advisory and the world is changing with this, and how you’re taking a world that was so layered with gatekeepers and middlemen. And you’re really just flattening it out. The internet changed things for a lot of reasons. But this has an ability to really disrupt all these middle people that are holding everything together. And, I think that’s really exciting to tell clients about, whether you move forward with it or not.

Tyrone Ross

Yeah, I agree. And that’s one of the things that is not talked about enough to me is everyone’s like, “Oh, well, you know, how do we do crypto?” And like, first of all, you need to hire the people who know crypto. And if you aren’t a traditional firm, they’re not trying to work where you are. They’re trying to leave where you are, and can’t go to companies that are being innovative. And I’m sure you get asked this question as well as you’re raising capital. Like, “Well, why? Why wouldn’t the incumbents do this?” Well, for one they haven’t, yet, and two, they just don’t have the intellectual capacity, right? The folks there who know it enough to do it. So, that dearth of talent, right? And there’s just been this exodus of talent from the traditional world into our space, and to build the future of financial services. And I think it’s a beautiful thing to see. But that’s a really good point. So just hold in here for a second. For advisers that, and you said something that I think is so powerful because I say the same thing as you said “minutes versus days,” Right? And I think that’s the whole thing that we want an account being open, funded and traded. That taking days is ridiculous. Like, that should be minutes and ultimately, seconds because it can happen now. But, in a traditional world is just a long time of, “is it ACH? Is it wire? How are we getting the money in and once it settles how much is available saddling?” If you build in the space enough, you just learn after a while and like, “Oh, they did this on purpose,” right? It doesn’t really, it doesn’t really have to be this way. Leaning in even more, is one of the things that again, even working with you, all right, and we’re excited for that, to bring your services and what you’re doing for billing, there’s technology there to allow an adviser to bill by the day, right? Or to bill by the week, why are you billing quarterly in advance, or whatever else, when you can pull the fee in real time, if you choose, get paid and kind, like all these things are there. So, before leaving this, I just want you to know, what do you see in your vision, right? Because you are very much a visionary of what the RIA space looks like 5, 10 years from now, if on ramp is successful, if Smart Kx is successful in helping advisers run a more efficient practice.

Lacey Shrum

It’s funny, you asked that. The other day on Twitter, there was an ongoing Twitter debate this weekend that I was leading the charge of. So, I always look at it as a founder, like you’ve got to keep this big vision in mind. And then you’ve got to really be able to drill into where your clients are, what their pain points are right now. And so, I think we’re getting to the stage where the clients are saying, okay, quarterly in advance doesn’t make sense. But, we’ve had to do it before because billing was so terrible to begin with. So, we only did it four times a year. And that became the industry standard. So that’s what everyone’s doing. But then it’s just logistically difficult to carry out. But then to think about changing that fee schedule. I mean, if you say that to most advisers are like, “Oh, no, no, no,” like, it’s just the logistics of deciding what it is getting the paperwork out doing due diligence on each of the contract, what consent do you need, then getting the notice the clients, getting them to sign if they have to, then when it does change, to average daily balance, I’d say, in the middle of a quarter, you’ve already built in advance, so the whole deck is thrown up, you’ve got to reshuffle you know, and do all the calculations, which is very difficult to do and execute. We do that, like that’s part of what we do. And so, that adviser has a lot of flexibility. So, I think long term you’re going to see, I mean long, long term, I think the adviser relationship, and what is financial advice will be drastically different. There’s too many things out there on the horizon that are going to pull threads out of the quilt as we know it. But that isn’t to say, I’m thinking that advice will never be, and that people will not need financial advice. I just don’t know what the financial advice looks like, where it’s coming from or how it’s being compensated. But, I think in between those two times, being able to move from quarterly in advance to what is advice, I think you’re going to see in the next five to 10 years, advisers get really comfortable with being able to move a lot faster as they begin to trust more in technology. So, you and I set up this whole meeting on email, we had a relationship through Twitter and text long before we met in person and that was very normal. That I did not feel like “Oh, is it really Tyrone that’s gonna show up to the meeting?” And that’s like, normal life because we trust how technology works. And that is easing its way in. Think about an Uber. The first time I got into an Uber at a girls trip, my friends were like, “You’re going to get into a car with somebody you don’t know and have them drive you somewhere?”

Tyrone Ross

Yeah, my mother still can’t get with that.

Lacey Shrum

So, I think you’re gonna see advisers trusting technology to take on more. Like billing, for example, we can do billing a lot faster. We do audit, the samples actually work in our type of audit situation versus what you’re doing. And so, they’ll trust the systems more to continue to progress. That’s going to force the industry to be a lot faster, people are going to have to respond. Clients are not going to be putting up with days to get a wire transfer done to move money. FinTech is going to force the industry to start chipping away those layers. So, we’re moving a lot faster and just more flexible like agile, right? We’re not bendy right now. We’re very stiff and unworkable.

Tyrone Ross

Yeah, I agree and for an industry that is built to serve and meet the best interests of the client, none of the things right now are in the best interest of the client. Mainly the experience itself, right? And if the ability is there to fix it, we should do that as an industry. You know, I love the fact that there’s so many people trying to push here and it is hard to push on the RIA space. It is a $100 trillion market with legacy. Brands don’t have to move. They’ve always done it this way. And we’ve seen robo-advisers and we’ve seen discount brokers, this is no different. This is all of that combined, right? And it is the nuclear bomb on an industry that just refuses to innovate. And it is going to be forced to now.

Lacey Shrum

In defense of advisers, it’s not their fault, or really like each individual’s weight to carry to like break through this industry and push it into the 21st century of technology, because they’ve really just been done in sort of a disservice by the large conglomerates because they’re like, “this is the way it is, you play in our sandbox. Everyone else’s sandbox is scary and overpriced. Don’t play over there.” You start talking about the Fed versus Bitcoin. Oh, we’re safe. Like that’s scary internet people. It’s breaking like the cracks are there. We’re running a siege against the city walls.

Tyrone Ross

So, as we wind down here, please take the time to let everyone know what you’re up to, where they can find you. Right. And, you know, reach out for not only building but again, just your counsel, because you do so much about this, but the floor is yours for that.

Lacey Shrum

Thanks. Yeah, we’re at smartkx.io. “Kx” is shorthand for “contract” in law school, for all lawyers out there. That’s where the name came from, you know, we did start out with the inspiration from a smart contract of putting pieces that were dependent and could be run autonomously together. So that’s where the name came from smartkx.io We’re on Twitter, LinkedIn, we do push a bit more content out now. Try to bridge the gap from you know, where advisers are right now to what you and I see is that long term vision, with a little humor sometimes if we can get it in, and then I’m on Twitter @Lacey_Schrum. If you’re doing any of your fee-ing in Excel, you are ripe for help and we want to be able to help you. So please reach out to us and we will help you.

Tyrone Ross

I will put the bow tie on that by saying this to everyone out there. I’ve been at this as an adviser for almost seven years now. There are a few people that I just think I would leave in a room with a bunch of financial advisers and allow them to talk crypto and all the innovation and how it makes sense. And Lacey is very high on that list, holding her very high regard. We’re excited to be working with her and just gleaning from her brilliance and what they’re building it Smart Kx, so reach out ASAP because I’m sure 90% of you listening to this need help with your bill.

Lacey Shrum

And thank you so much for your kind words.

Tyrone Ross

So, I always end the episodes this way. If you made it this far, and you found any value in this podcast at all please run to nokidhungry.org Let’s help feed hungry children. There’s no reason a child should be going to bed hungry. And the great United States of America with all of this money floating around, and now a Bitcoin linked futures ETF, a lot of money floating around. Let’s feed some hungry kids. But Lacey, thank you so much for coming on. Thank you everybody for listening and we’ll see you guys in the next one. Appreciate you.

Lacey Shrum

Thanks, Tyrone. Bye.