NAPFA

Veritat is a start-up seeking to leverage process and technology innovation to scale a business model that is typically saddled with persistent and burdensome variable costs.  If successful, Veritat will be able to deliver premium services to a mass audience.

As a registered investment advisor (RIA) that adheres to the fiduciary standard, Veritat provides comprehensive financial planning services through financial advisors who are employed by the company and share a common sense of mission.

We spoke with Dr. Kent Smetters who is the President of Veritat and a professor at the Wharton School at the University of Pennsylvania. 

Annuity Digest: How did Veritat come into existence?

Dr. Kent Smetters: Until about five years ago, I had been doing research in the area for years, but have been involved with few real world applications. Then, with the struggles of tenure finally behind me, I looked at the space closer and was shocked.  A close friend of my family received services from an advisor at Ameriprise.  This person had diligently managed to sock-away $125,000 and yet was charged an astounding $7,000 in loads on this money.  It blew me away that this practice was actually legal.

Our financial system provides the rich with a wonderful fee-only model and a financial advisor who is a fiduciary. But it is too expensive for everyone else. Our mission is to make this model accessible for everyone while still having continuous access to a dedicated financial advisor along the way. A web-only solution will never work. People want to talk to an expert that listens and is truly on their side.

We have spent a year and a half developing technology.  In some instances we have been lucky because our skill sets fit so well with our product development efforts.  At same time, the experience has been painful.  There are so many inefficiencies and problems in the industry, and fixing them took a lot of work. The outcome and validation has been terrific. But it was a struggle.

Annuity Digest: Who is involved with the venture?

Dr. Kent Smetters: At the moment, we have around 10 full-time equivalent employees. The staff is evenly split between technology and business.  The co-founder, Danielle Qi, was a former student of mine who worked at McKinsey Consulting for a few years before joining me at Veritat. She is terrific at operations and establishing scalable processes; my strengths tend to focus on product and partnerships.

Our technology team is very senior and our development framework is Ruby on Rails.

Annuity Digest: Can you talk about your financial advisors – how many are there, are they all independent contractors, are they all independent RIAs serving as fiduciaries, etc?

Dr. Kent Smetters: All of our financial advisors are employees—not independent contractors or affiliates. They are paid base salary plus a bonus that is a function of the number of happy customers.

Some advisors have contacted us about partnerships.  We have declined because of our concern about maintaining objectivity through a purely fee-based relationship and fiduciary status.

We have a few financial advisors now and will have a dozen more in a month and a half.  We will grow over the next year and half to around 50.  Going forward, I envision several hundred advisors and we will scale-up faster if the need arises.

We’ll never attract the highly compensated sales person as an advisory, but there are a ton of advisors out there who are on board with the mission and the industry average salaries we pay. We get a lot a resumes and screen carefully to make sure that the advisor is really mission-driven like us.

Annuity Digest: Are there any institutional partnerships in place to build the advisor base—NAPFA for example?

Dr. Kent Smetters: Again, there are no partnerships for advisors, but all of our advisors will be NAPFA members and the company is a NAPFA company (fee-only, no commissions and a fiduciary role). However, we are open to a reasonable white label business-to-business relationship that allows large financial services company to use our scalable technology and processes, provided that our name is not being used if they are not fee-only.

Annuity Digest: Is there a limit or hard-stop on the amount of time a financial advisor can spend with a client, and are there additional fees for your client-requested on demand appointments?

Dr. Kent Smetters: There is no limit on the financial advisors’ time.

The point you raise is good, however, as this issue will test our business model over time.

So far, we have had no issues with the customers who want to talk a lot.  We will just have to tackle this issue if and when we encounter it.

Annuity Digest: Can you comment on your approach to risk management?

Dr. Kent Smetters: My strong belief is that conventional risk management approaches are incorrect as they dial-up risk too much. The reason is that there is too much focus on expected returns and Monte Carlo analysis.  Those concepts focus a client’s attention on a safety margin at the end of life.  In other words, more stocks equates to higher expected return and more assets at end of life. 

This does not make sense to an economist.  How could you possibly call this safety?  It should be interpreted just the opposite, as a pure compensation for risk.

Clients do not understand Monte Carlo analysis—so they simply focus on the expected returns.  In addition, Monte Carlo analysis assumes a normal distribution which is empirically rejected by data.  Also, Monte Carlo analysis does not talk about the actual downside severity.  Severity must be taken into account, not just the number of times assets fall short toward the end of life.

Conventional approaches also assume that the portfolio is completely constant throughout the entire pre-retirement period, and the same across many goals.  There is no logical way of life-cycle planning that would keep a portfolio fixed throughout all pre-retirement years.  Traditional methods generally also ignore human capital and how it depreciates over the lifetime. 

At Veritat, we adjust a portfolio’s risk exposure based on a variety of factors: human capital, time to goal, priorities, and risk preferences. Each goal has a portfolio that is appropriate for it. We also stress test more rigorously by using risk-neutral probability measures that extract out any appearance of a “free lunch” coming from taking on additional risk. We really want the risk management conversation to come down to a discussion of the sacrifice that the client needs to make today in order to achieve goals, and what portfolio allocation is reasonable to achieve those goals.

Annuity Digest: Can you comment on the retirement income aspects of Veritat’s services?

Dr. Kent Smetters: When it comes to the decumulation phase, we will use a type of phased withdrawal that cushions longevity risk.

Next, we will recommend some level of annuitization to clients.  However, we will not recommend any of the heavy loaded annuities out there.  We are comfortable with annuity recommendations to the extent that the annuity is low load and truly a life annuity rather than a certain term.

Annuity Digest: As a fee-only RIA, does Veritat refer annuity product transactions to outside partners?

Dr. Kent Smetters: Yes, any insurance transaction is referred-out to partners.  We develop relationships with brokers who use annuity products that either are low load to begin with, or have expense structures that can be negotiated with the insurance company. We won’t accept any commission from the service provider on any recommendation we give, including from insurers.

Annuity Digest: Can you talk about customer acquisition strategy and the scalability of your business model?

Dr. Kent Smetters: Regarding the cost of customer acquisition, we hope to get lower than industry norms.

Our customer acquisition strategy is premised on transparency and differentiation through white-hat processes.  The number one reason that broker-dealers and commission-based advisors must spend so much on acquisition is that the customer does not know how the advisor will be making money.  As a result, quite a bit of relationship building is required. 

That ambiguity is expensive—industry average acquisition cost is up to $500 per customer.

Our approach is to let customers know exactly how we’re making money and our model is different from a commission-based platform.

We hope this will help cut through some acquisition costs.

With respect to scalability, we rely heavily on technology to support process innovation.  For example, the number of clients per advisor is relatively higher in our model because our advisors spend about 93% of their time in front of clients.  We do not need to focus on the traditional time sinks.  We have pros who spend a lot of time looking at the financial plans as they come out.  All plans are reviewed by humans and presented by humans to clients within a dedicated and repeated relationship.

With our model, it is also true that each client touch is shorter than industry norms, despite the overall number of touches throughout the year being higher than average. 

Again, we don’t need to focus as much on the traditional sales efforts.  Our initial assessment is 15 minutes and it is substantive.

In terms of attrition and conversion rates, our business model is rather conservative assumes industry averages in the near-term.  In later years we make some more aggressive assumptions.  That said, there is no question that time spent with clients who do not convert or fall-off is a cost to us.

Annuity Digest: Can you talk about distribution strategy – does it involve direct-to-consumer, worksite, financial institution partnerships, plan sponsor, etc?

Dr. Kent Smetters: It involves all of the above.

We are looking at different partnerships, including worksites and smaller financial institutions.

We are also interested in the direct market.

We have some conversations with smaller insurance companies as well.

Annuity Digest: Are there any additional thoughts or comments that you would like to share?

Dr. Kent Smetters: I would simply say that at a high level, the company was created for the purpose of bringing an honest, objective financial planning service to households who in the past would not have been able to afford these services.

We are very mission driven.

But we are not a web only solution—we believe that a strong human touch is an important part of financial planning.

Annuity Digest: Many thanks for your time Dr. Smetters.