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Come on in, sit back and relax. You’re listening to Episode 242 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, founder of Ezra Group Consulting. This podcast features interviews, news and analysis on the trends and best practices, all about wealth management technology.
We have a great episode in store for you, I spoke to Jeff Coyle, founder and CEO of Libretto. Libretto is a interesting financial planning application a little bit different than most of the financial planning tools and Jeff will tell you all about it, that we’ve covered things such as how they’re different, how they quantify risk tolerance differently without questionnaires or without a Monte Carlo, how they use liabilities as a framework, how they are priorities based planning, which is different than goals based planning, and how they integrate and deliver portfolio management recommendations.
But before we get started, let’s talk about tech stacks. At Ezra Group, we’ve seen tech stacks of hundreds of RIAs and let me tell you, most of them are loaded down with tech debt. So you shouldn’t feel too bad about yours. But let’s face it tech debt is like a giant anchor, holding back your business growth. If you want to free your firm for exponential growth, you should run, not walk to our website EzraGroup.com and fill out the Contact Us form. Our experienced team can evaluate your current tech ecosystem, deliver targeted recommendations, optimize your existing systems and operations or run an RFP and help you implement new software to take your firm to the next level. You can take advantage of our free consultation offer by going to EzraGroup.com.
Topics Mentioned
- High-Net-Worth Wealth Management for the Masses
- Beyond Risk Tolerance: Understanding Risk Suitability
- Systematizing Comprehensive Wealth Management
- From Human Capital to Estate Planning: Understanding True Wealth
Episode Transcript
Craig: Here we go with our next I’m excited to introduce our next guest. It is Jeff Coyle, founder and CEO of Libretto. Hey Jeff, man, glad you’re here.
Jeff: Well, thanks for your asking me to join you.
Craig: Absolutely. Where are you calling in from?
Jeff: I’m from Los Angeles.
Craig: Fantastic. We were just talking about snowboarding, Mammoth Mountain is close. Do you ever go to the what’s the of the mountain closer to you two hours away?
Jeff: That would be Big Bear.
Craig: Big Bear, it’s like two hours east of LA, right?
Jeff: Yes, yes. Yes.
Craig: I wanted to go there, but it was raining. So I drove seven hours to Mammoth. That was not a fun ride.
Jeff: No, but it was a good choice.
Craig: It was great. When I was there. It was fantastic. But it was a long that’s a long ride.
Jeff: The snow is better, bigger mountain. It’s worth a bit more effort.
Craig: I thought so. It was fantastic. Cool. So let us get started with this interview. Give us if you will, a 30-second elevator pitch for Libretto.
Jeff: Libretto is your control panel for delivering personalized advice at scale. And everybody needs a clever tagline and ours is make every client feel like they’re worth 100 million. And where that comes from is our background is managing the wealth of the most affluent and, and the methods that we use are more robust. However, those methods are far more important to regular people. And the reason they just they can’t afford to make mistakes.
High-Net-Worth Wealth Management for the Masses
Jeff: Libretto, basically, what we don’t do is we don’t use risk based questionnaires. We don’t assign a model portfolio to that risk based questionnaire and certainly don’t run a Monte Carlo what we do as we we build personalized solutions using more advanced asset liability methods. And as we do that, there’s five things we do we manage the full financial structure. We incorporate every current resource every future resource, every liability and every objective. And then we apply priorities based planning so that the strategy is fully aligned with the life that the client envisions and then that priorities driven planning process basically drives a personalized portfolio construction process that uses liability matching methods.
Jeff: And then of course, it takes more than a portfolio to achieve a series of outcomes and Libretto will help you to systematize the application of insurance entity structure tax minimization, other non financial solutions. And when when you’re done, you’re really delivering a family office experience. Which by the way is just a fancy name for for comprehensive wealth management. It’s the same thing. Llibretto is seeking to bring more advanced methods and make sophisticated wealth management easy.
Craig: What I thought was interesting about your product, there are a lot of vendors out there that offer financial planning tools and we are experts in that area. We do a lot of research in financial planning just like every other technology in wealth management. But in financial planning, usually there are firms that application will start out as mass affluent, and then add features targeting high net worth, that are real estate planning and other tools that are targeting high net worth but you’re going the opposite. You built a high net worth platform that you’re now targeting mass affluent with would that be a fair assumption, a fair statement?
Jeff: It is and that’s a good insight, because it’s it’s much better from a process perspective. It’s much better to start with an ideal ideal framework, and then actually make it more actually simplified after the fact. It’s much more difficult to take a simple solution and try and make it more complex because the foundation that you’re working with isn’t as robust. So if you start with an ideal solution, the foundation that you’re working with is ultimately robust and your ability to organize it to be delivered to different client segments is enhanced dramatically.
Beyond Risk Tolerance: Understanding Risk Suitability
Craig: Going back to something you said, you don’t use risk based questionnaires, so you don’t run Monte Carlo. So how do you when you’re building an asset allocation, how do you quantify the client’s risk tolerance, risk capacity, and others other parts of that risk?
Jeff: What you do is you you basically align someone’s strategy to the life that they envision and that’s critical. So when you give somebody a risk based questionnaire, it’s really a risk preference. Am I a risk taker? Am I risk avoider? What’s missing? In that puzzle is the actual purpose the money is designed to support when you instead start the process by identifying the family’s priorities. They have a personal lifestyle that they like to live. They have objectives they’d like to accomplish with their family. They’d like to affect society in some positive way.
Jeff: And each one of those outcomes you can then actually identify each one and then prioritize them. And some of those are essential. You want to avoid risk. Some of those are important you can take some risks and some of those are discretionary. You can take more risk. So what’s actually happening in an interactive, enjoyable conversation with the client? The client is actually identifying the suitability of taking the risk, not the preference, but the suitability of taking risk.
Jeff: The other thing that we know from that conversation is not only the suitability of risk but we know when every dollar is needed. So what we’ve just identified as we’ve helped the client to articulate the purpose of their wealth. And then they’ve identified the timing and characteristic of every dollar they’re going to spend. Then what we can do is we can take each one of those dollars and then match it with suitable asset allocations and thereby, when we roll that all up, we have a highly personalized strategy. And that strategy is entirely aligned with the life that they envision every asset is serving a distinct purpose.
Craig: Jeff, allow me to press you a little bit on on something. So when I hear the word “suitability” to me that says broker dealer, broker dealers talk in suitability, whereas financial advisors, financial planners, talk more in fiduciary, or risk tolerance and risk assessment. So, what do you mean by suitability and how do you align that with risk tolerance and risk capacity?
Jeff: In a broker dealer framework suitability is a function of, can I sell this product to a client is it suitable for them right? In this in a planning context is entirely different. It’s more that the client is actually saying, hey, we want to be able to sustain a significant downturn if it occurs. We need to be sure we can cover our essential spending if it’s necessary. And because it’s essential spending, it’s not suitable to take risk. That’s where we avoid risk.
Jeff: Yeah, on the other hand, we might want to buy a second home and seven years and that’s a discretionary objective for us if we can afford it, that’s great. And because of that, it’s suitable to take more risk. And so in this case, it’s the client that’s actually communicating the suitability of risk to us as they prioritize each one of their outcomes.
Craig: Do you have a list of questions for the advisor to ask to gather that information?
Jeff: We do, but it’s it’s completely a natural interactive process. You start when you when you kind of deconstruct what somebody’s trying to accomplish. You start with their lifestyle and you identify what their total lifestyle spending is. And then for retired couples, in example, you would then say, well, hey, if we were back in deflation, the 30s or stagflation the 60s, 80s What could you get by on stay in your home and be okay. And that’s really essential spending. What we do there is we can immunize that essential spending for the rest of their life. This is real risk management, we can put a hedge in place and short of the US government going out of business, they’re going to be just fine.
Jeff: That is an example of somebody identifying an essential need, it’s very easy to do, how much do you spend, how much of that’s essential? Now you move on to your children. It’s interesting you there’s really nice frameworks, Warren Buffett has a wonderful adage which is, I’d like to give my kids as much they can do anything but not so much they can do nothing. And when you think in that context, you’d say, well, what would I like to accomplish my kids? Would I like to afford the best education possible? Would I pay for a wedding, would I buy them a car when they got out of school? I help them with a down payment on a home when I give them a supplemental income so they can make a career decision not based on economics. These are frameworks and it’s just part of a process.
Jeff: The reason it’s nice is when you when you do this frequently you actually learn what most people would do if they could afford it. You can put that into a framework very easily makes the conversation very easy and enjoyable. And then families can immediately identify Well, what would we like to accomplish with our kids? And why would we like to do that? And then the last component of this is what we call social influence. And that is your philanthropic and usually people are nervous to give because they don’t know if they’re personally covered and their families purpose uncovered.
Jeff: But once they understand that their personal lifestyle is addressed to their family objectives are addressed, now they feel much more confident to give and that empowers them to be more proactive, and cause change in the way that they’d like to see change affected more positively. So it’s a really nice easy framework. Using this system. It’s designed to be an interactive planning process. When you meet with clients, you bring it up and you have an interactive discussion takes about 15 minutes to review their financial condition and they walk out of there with complete confidence.
Craig: What more can you ask for? I would love to have complete confidence. That’s one of my goals.
Jeff: It’s interesting, Craig because one of the things that I typically am interested in is what’s interesting is most families are already financially successful. They just don’t know it. And the reason they don’t know it is because they don’t fully appreciate the value of their human capital. That’s the present value of their future earnings. It dominates the wealth of most wealth building families, and yet they’re completely unaware of it and they’re also unaware of the present value of their Social Security benefits. For a typical retiring couple, the present value of their social security benefits is worth somewhere between a million and a quarter and 2 million. And the reason it’s interesting is, is that even families that earning minimum wage, to put their kids through college and be financially successful, and so the key to his success is really just starting early enough.
Jeff: And there’s two things you really need to do as your wealth building family is just one size your life appropriately, don’t spend too much. And then secondly, earn your human capital. And when you think of an a liability framework, rather than a probability framework, you go directly at the problem and that is to say, Well, how do I increase the confidence I earn my human capital? I buy life insurance, I buy disability insurance, and then I might want to protect your reserve. It’s, it’s a protective device. When you’re in your wealth building years. It says, Well, hey, maybe I want a year or two of spending. So if I lose my job during a downturn, I’ve got the time to retrain and find another job and start saving again. So the key is the framework is it’s very intuitive, and yet it’s just a bit more robust.
Systematizing Comprehensive Wealth Management
Craig: I like having liability framework built in that’s a new idea for a lot of financial planning tools including liabilities we were so focused on assets for so long. We didn’t we can’t really forgot about liabilities are just as important.
Jeff: There’s two kinds of liabilities and the one is liability a banker thinks about and that’s a mortgage. And the other kind of liability is, hey, I need to be sure I can spend an essential dollar for the rest of my life and the non essential dollar. So those are spending liabilities, but if you kind of go to the asset liability picture go to the mortgage for a minute, when you build a strategy for someone, one of the things that Libretto enables you to do is to manage the full financial structure. And what I mean by that is, when you build someone’s strategy, you actually incorporate their home and their mortgage into their strategy.
Jeff: A mortgage is a type of opaque leverage. It basically elevates your exposure to risk assets. And you want to be aware of how that leverage is affecting your structure. You also want to incorporate someone’s human capital. That’s the present value of their future earnings just dominates the wealth of most affluent families, and yet they’re completely unaware of it. And when you become aware of it, it changes the way you think about solutions. And as I just mentioned, Social Security is a non trivial asset to families. It’s worth a million a quarter to 2 million. And what’s interesting about Social Security, it’s really a long term inflation protected bond that it immediately address it directly addresses longevity risk.
Jeff: What we want to do is we want to fold Social Security into the bond structure so that we don’t unintentionally over allocate to fixed income, which is generally the case. And then as you as you start to work with more complex families, you fold in their operating businesses, their properties or their private assets, and every estate ever wealth level you fold in expected a stake and flows from the generation above insurance payoffs, maybe royalties.
Jeff: So what’s really happening is when you’re building a strategy, a portfolio is not a 60/40 portfolio because somebody answered moderately aggressive it’s actually behaves like a completion fun. It recognizes all of those other resources I was just fine and it fills in the voids to create a comprehensive solution. So so when you when you think of liabilities, yes, your mortgage is a liability. Now all of those resources I just described, how do we align those resources, so they serve the needs of the family, the personal family and social objectives of the family? And those are their spending liabilities. And so what you’re really doing is you’re systematically saying, How do I match all of these resources to support and achieve those different objectives for slash spending liabilities?
Why Switch to Selling Software?
Craig: Jeff, you talk a lot like a high net worth advisor, can we just diverge for two minutes. How did you get here where you found it a couple of high net worth advisory firms you were an executive at Northern Trust. Why get into the software business? This is a dirty messy business. What made you to jump ship from the the investment side the advisor side to the software vendor side?
Jeff: I’ve been doing this for quite a long time. By they way, I started my career working with families of normal wealth and and then I built systems that were more valuable to people with more complexity. And so I ended up in a place called myCFO back in 2000. And I was Chief Strategy Officer and head of investments and, and our average client was under 25 million, that assignment. And I worked on the larger funds and that’s where I learned to work with families and wealth into the billions and back then there were no systems to actually manage that kind of wealth and I had been building them for years before I got to myCFO. And the nice thing about myCFO was a technology based firm.
Jeff: And so we were actually building my systems back then. That was probably the biggest gift in my career because when you walk around round the world every day you kind of do things in a generalized way when you have to build it into technology forces you to think the fifth decimal point. So that level of rigor stuck with me and and then I started advisory firms. I also built systems for managing that wealth, Northern Trust, they acquired my last system. I spent two years there as their deputy CIO institutionalizing that across their firm and wonderful experience and and now it runs their program.
Jeff: Then I kind of retired for a bit and I didn’t retire but I took some time off. And I had to build some tools to manage our own resources. And I finally figured out something that eluded me for two decades. And that was the whole asset liability matching process within a unified planning and portfolio and wealth management construct. And that’s where Libretto comes from. And it’s interesting, yes, I’ve managed the wealth of very affluent families, but these methods are so much more important to people, normal wealth levels, because you can’t afford to make mistakes. And that’s what motivates us is to bring these methods to the broader population.
Craig: That’s an awesome goal. Thanks for for giving us a quick overview. I was looking at some of the screenshots you sent over I did have a demo of Libretto, but it was a while back what I remember and looking at your screens, I like how you’ve got a lot of other things in this list of priorities besides just their, their current assets. We normalize that you’ve also got parental support, weddings, education, all listed under priorities. So how does that fit when you talk about asset and liability matching? How do you do that matching process and how does that fit into what kind of portfolio management are actually doing? Is it a full blown portfolio management or is it a light portfolio management?
Jeff: Oh, no, it’s a full blown portfolio management. It’s decades. It’s a type of portfolio management that’s more rigorous than what most people will say. And and the first thing is you started at exactly the right place, which is, well, what are the priorities of the family? And what’s interesting, people can articulate this beautifully. If you just set up the proper framework, you ask the right questions. And that’s what the technology does and enables you to set up a framework and ask the right questions.
Jeff: The first question is, well, how much do you spend and then you help to identify if someone’s retired. Well how much of that’s essential? Well, I’m going to protect that and in the case of it in our case, we’re actually going to protect with the hedge, they’re going to achieve that outcome. And this is not a probability, it’s real risk management.
Jeff: Then you move on to their family objectives, and they’d like to put the kids through college and they, they’d like to augment the spending of their parents because they need to, they’d like to give $1 to charity. And each one of those objectives of theirs, they’ve prioritized and so they’ve identified and said, Hey, this one’s essential, avoid risk. This one’s important. We can take some risks. This one’s discretionary, we can take more risk.
Jeff: And once you know that this sort of going back to the original question the suitability of taking risks, but we also know exactly when every dollar is needed. So we can then actually identify and say, hey, if it’s a discretionary objective that’s needed and 10 years, we know exactly how to invest that dollar. And when I say that, when we start we assigned suitable asset allocations.
Jeff: Another way of saying suitable asset allocations, we actually define factor level exposures for that dollar. So, if that dollar needs a bond what should be what should be the term of the bond should be short or long. She went should the credit quality be high quality or low quality? Should the bond be a fixed coupon or should it be inflation protected? And then we have similar types of risk exposures that relate to the equity structure. So quite literally every dollar will be described by seven different factor exposure, some of them fixed income, some of them equity, and at that point, we know exactly how to invest every dollar. And then we can take each dollar and we roll it up. And now we know how to invest for university education. We know I know he does the 529 plan. And then we roll all that up. We now know exactly how to invest the overall household portfolio. And then all we do, we just map the investments of the advisor to fulfill those risk targets. And all of that is done by technology and that’s the beauty of technology is it can simplified, very complex and sophisticated processes.
Craig: That is the beauty of technology or one of the beauties of technology. One of the things you use, I was reading in your background information, and we are understanding we understand a lot about financial planning. We understand goals based planning and cashflow payment planning, but you use the term priorities based planning. How is it different than goals based planning? Isn’t that the same thing?
Jeff: It’s actually fundamentally different. Now, having said that this is the third system that I’ve built and the last two systems were goals based systems. What’s different about a priority space system over a gold system is gold just tells you you want it, you want to accomplish something. But a priority tells you the relative importance in your life. And so you’ve identified that yes, I’d like to put my kids through university education. But a priority tells you that’s an important rather than discretionary objective or rather than essential a gold just tells you what to do it and because you understand the priority, it gives you information about suitability of risk, and now we actually know how to invest $1 in a very systematic way.
Jeff: And this so so what a priority does is it gives us much more information. It gives us information around the suitability of risk and the time that when the dollar is needed. And in that point, you can actually diverge from a traditional goals face solution, because often what will happen is people identify a goal. And then they’ll say, Hey, I’m a moderately aggressive investor. And then you say, well, if I’m a moderately aggressive investor, I get a 70/30 portfolio and now I’m gonna run a Monte Carlo. And all of that is really detached from the purpose of the actual asset. We did priority in life, when you actually link all of that. Every bit of that now starts to inform the portfolio. So it’s it’s kind of the difference between playing a piano with two thumbs versus 10 fingers or 10 digits. And that’s really what happens and so the the, it’s a far more robust solution, but it’s super easy to implement. And so you can really make sophisticated Wealth Management accessible.
From Human Capital to Estate Planning: Understanding True Wealth
Tools(6)
Craig: Jeff, we’re running out of time, I have one or two more questions I want to squeeze in because this is really fascinating to me. When you talk about systematizing the application of insurance with entity structures and tax minimization, with a more rigorous portfolio management construct. Does your application have portfolio management tools such as trading, rebalancing, performance reporting those types of tools? Would you send that out to another application or another source?
Jeff: No, we do and we don’t, but certainly be clear about that is the way that Libretto we basically have we build integrations with portfolio accounting systems. And we have integrations with most of the portfolio accounting systems out there and that data flows into Libretto. And now you have we have every position every tax basis, every account every entity, so we we understand the financial structure related to current resources. But simplistically half of the wealth of the family, it’s not inside of the portfolio accounting system, and Libretto enables you to complete that. You add their homes and their mortgages, their present value of their future earnings, human capital, their social security, their pensions, your operating businesses, their estate inflows, their insurance payoffs. Now you have 100% of their financial structure and you can actually do some significant work with that.
Jeff: Now we can then say to a client, well, how would you like to allocate your wealth now that you understand the true value of it? Well, we like to allocate it intentionally, X amount to our personal lifestyle, this amount of to our family, this amount to society. And as you do that, it builds just automatically a personalized portfolio expressed in a factor level. And then the advisors investments are just mapped to that and now they’re implementing portfolios they’re familiar with. On the other side of this though, it takes a lot more than a portfolio achieve a series of outcomes for a family. And what’s nice about this, we now actually understand the value of their human capital and how critical that is to their financial success.
Jeff: Libretto will tell you how much life insurance to buy because it knows that information. It’ll tell you how big of an excess liability umbrella you might want. It can identify and say, Hey, these are kind of the core estate planning documents you might want to use. And it can also help to identify non financial solutions. Maybe somebody needs to help your advocate or they should think about a donor advised fund is an example. And all of that is systematized. So what’s interesting is when you go into your question when you move beyond a goal framework, and a risk based think Monte Carlo framework, and you move into a personalized framework using liability matching logic and methods it completely opens the door and now you have the ability to systematize and unify the planning process with personalized portfolio construction and the application of comprehensive Wealth Management Services.
Craig: I can go on all day like this, I think I find this fascinating and I really like what you’ve done at Libretto to try to do something different around financial planning, but we’re out of time. Could you tell the listeners where they can find more information about Libretto?
Jeff: Our website is Libretto.io, and that’s a great place to start and if you’re interested in a conversation you’ll find a place to set up a meeting and and we would look forward to speaking with you.
Craig: We will have links in the show notes to the website. Jeff, thank you so much for being here and sharing so much about about your application and a little bit about yourself.
Jeff: Well, thank you Craig. I appreciate the time.
