Annuities Made Smarter, Faster, and Better with Rich Romano

Jack Sharry: Hello, everyone. Thanks for joining us on this week’s edition of WealthTech on Deck. I have the privilege each week of speaking with senior executives about their leadership roles at wealth and asset managers, fintechs, insurance and annuity companies, and workplace retirement businesses. We focus on the strategies these various firms and individuals have developed, their views on trends, and what disruptions they might find interesting and/or might be causing. Today we talk with Rich Romano. Rich is the chief executive officer and co-founder of FIDx. He and his team are working on ways to revolutionize the way insurance products are used to achieve client retirement goals as part of a comprehensive wealth management approach. Rich, welcome to WealthTech on Deck. Good to have you on board.

Rich Romano: Thanks for having me, Jack.

Jack Sharry: So, Rich, let’s start with you telling us about FIDx. Not everyone may know, I’ve been following you guys for a while and doing fun and interesting things. What is FIDx? What do you do? How did it all come about?

Rich Romano: Sure. So I’ll start at the beginning and come to today. Right? So in your question, it’s backwards going forward. So…

Jack Sharry: Sure.

Rich Romano: We were born back in 2017. And we were born out of the idea that ultimately end clients should have access to every product and service that’s going to basically let them achieve their goals and handle generational planning and take care of all their needs. So in order to do that, you just can’t think about SMAs, mutual funds, ETFs, and investment instruments, you have to think about other asset classes, right? And lo and behold, it was how do we bring annuities into that ecosystem, and really focusing on them as a portfolio building block versus historically looking at them as transactional items that are bought, right? So that was the genesis of the idea. And in order to do that, you have to be able to meet advisors and firms where they do their business, right? I mean, historically, carriers have always said, come do business my way, right, that’s the only way to do it. So if you had an advisor that worked with five carriers, they’ve got five different sets of processes, slews of different paperwork, and there’s no automation. So it’s not just a swivel chair, it’s a painful, painful process that results in a lot of advisors walking away, which means ultimately, they’re pulling end clients away as well. So we’ve built a technology and a services company that really looks to fit inside of those ecosystems. And you know, Jack, I think, in a couple of years, if nobody knows who FIDx is, we’ve been successful, right? Because we fit inside of these platforms so that if someone’s in the Envestnet platform, they have no idea where Envestnet ends and where FIDx begins. And that’s the way we want it, because we’re trying to make sure it’s not another widget, another tool, another technology that advisors have to use to be able to manage their practice.

Jack Sharry: Fill us in a little bit on the relationship with Envestnet, I know that they’re partners with you. Just talk about how that plays out, and also who else you work with beyond Envestnet?

Rich Romano: Sure. In 2017, the whole idea started with, inside of a conference room at Envestnet with eight of the largest carriers in the industry, right? So Envestnet, right, world-class wealth management platform really focused on you know, you’ll hear Bill Crager talk about the integrated financial life. And part of that is how do you bring these solutions to platforms. So they’ve already got a tremendous amount of expertise around wealth management and planning and transacting. So they decided, you know, we came together to build this joint venture where we would be the experts in insurance, right, in order to get to market fast to have the experts. So very much like, Envestnet’s the experts in wealth management, we’re the experts in insurance. So Envestnet has been our first platform. And along with Envestnet, you know, you can get access to FIDx through MoneyGuidePro, through Tamarack, through Halo, through SIMON, all of these platforms, because at the end of the day, the one thing that Envestnet prides themselves on is they’re trying to create industry solutions, not just Envestnet solutions. So they want us to go out and become an integrated platform, even to their competitors, because this is all about satisfying clients and advisor needs, and we all know, right, marketplaces are successful when they’re accessible by everyone.

Jack Sharry: So fill us in on your backstory, if you would. How did you, leading up to FIDx, how did you wind up in this business? What’s the story behind the story?

Rich Romano: I’ll try and give you the abridged version. But when I, you know I was in the early generations that had access to computers early on, right? So I always thought I wanted to get into systems development and computer design. And by the time I was ready to go to college, I found that I was you know, able to do a bunch of the senior-level courses. So I said, you know what, let me go through this thing called actuarial science because I loved math. So I got degrees in actuarial science and economics. And then I started working for insurance carriers. Decided, you know what, this is great, let me go see the other side of the business. So I got into consulting. I said, let me go to the last one, let me go to the firms that are building these platforms. So, you know, I really got a taste of all three of those. And what I realized was that I really enjoyed working with people and advising and helping them build solutions. So my path ultimately led into building a couple of practices focused on insurance, you know, life and annuity products. I’ve built platforms along the way, whether it’s policy administration systems, illustration systems, I worked in financial services and investment banking. So I’ve seen a host of the way the world works in capital markets. And, honestly, Jack, I always told people this, I feel like everything I’ve done in my career serendipitously led up to the formation of FIDx, because I got to see old technology, and the pain and suffering of trying to do new ideas on old technology, and doing new technology and how to fit that in and what was the right approach. So I got, on the way, that wide lens view to multiple industries, really was valuable in terms of how to go really build something for the future in a way that could be applicable across all of those different use cases.

Jack Sharry: So, in my view, annuities and insurance will play an increasingly important role as we move forward, enabling advisors to provide comprehensive advice and wealth management. Of course, I knew you were working closely with Envestnet, followed the news and so forth. We’ve had some conversations over time. But I didn’t know you were working with SIMON, of course you should. But didn’t know about that, didn’t know about Halo. And both are really innovative product developers and so forth. Talk a little about how you play with the different players, because the clear trend is toward platform and how you put solutions together, insurance being a part of that, as part of a broader wealth management approach, so talk about how that plays out, how does that all work?

Rich Romano: There’s a lot of analogies for it. But if you think about it, we believe that, you know, if you want to get to a certain area, you should be able to come in through any door you want, right? So what we did is we said we need to build this platform in a way which would expose APIs and application hooks so that any inbound platform could connect to us, right? As the experts in annuities, right, you always see things like, you know, like in the structured notes space, everyone said, “Hey, we do structured notes. Structured annuities are probably the same thing, because they have caps and floors and buffers.” But when you jump into the well, you don’t realize that the well is a mile deep, right. You think it’s gonna be the same level well as what was structured notes. So, you know, we came to partner with these firms, because we also realize we can’t be the best at everything for everyone, right? And that, you know, when I look at, you know, our partnership with SIMON, you know, they’ve got phenomenal pre-trade tools, they’ve got great education, they’ve got great quantitative analysis, things that we would never do, right, we have great operational prowess around trade and post-trade and pre-trade in terms of like, you know, executing these aspects. So, you know, we realized that people weren’t gonna knock at FIDx’s door, and we weren’t gonna knock on people’s door and say, hey, implement FIDx. So the strategy was very purposeful in that we would build an architecture that would go integrate into these.

Jack Sharry: So, Rich, one of things I find fascinating is the work you’re doing with SIMON and, following them, they seem to be a very creative, very thoughtful kind of company. Describe a little bit of what they do, and then how the baton gets passed, or how you guys work together to make what they do on the front end operationalized on the back.

Rich Romano: Sure. So SIMON is a phenomenal structured notes marketplace, right? It allows advisors and firms to pick certain note structures or build custom-structured notes and then place them for their clients, right, and everything around the planning aspect, the fit for the client in terms of exposure, and then product selection, right? And then what’s the right allocation model inside of that? So it’s a natural fit to say, there’s opportunities for protection, you think about structured notes, well, annuities offer protection, right? There’s an opportunity for a growth or an income note, right? Well, annuities provide income. So it becomes… the concepts are very adjacent to each other. So what we bring is the exact same thing around annuities because we believe that you’re not buying an annuity, you’re buying protection, you’re buying income, you’re buying longevity risk, right, you’re buying sequence of returns protection. So those fit very well alongside of those same concepts. So based on a client’s risk… view, it may be a fixed indexed annuity, or maybe it’s a structured note that’s against the S&P 500. Right. So it really does fit in the same portfolio risk analysis lens. And now we provide the addition of annuities that you can bolt into that same framework. And the same would be applicable with Halo, in that it’s the same structured note platform capabilities, right? And once again, much like there’s Envestnet and there’s Orion and there’s Black Diamond, there’s Halo and there’s Simon and there’s Luma. So all of those platforms kind of have a natural fit with us.

Jack Sharry: Yeah, and so talk a little bit more about how that plays out and I’ve heard Bill Crager and Envestnet talk a good deal about the intelligent financial life where all this stuff comes together. For now, for, pretty much across the industry, it’s a wonderful idea and a work in progress. So how does that sort of play out? So you come in through SIMON, you like their product set or Halo or whatever. And then how does it play out? If I’m a subscriber, I’m a user of Envestnet, how does that play out? And in a minute, I’ll ask you, and where’s it going? But for now, just how does that play out? If you’re an RIA or an independent advisor,

Rich Romano: I think if you look at Envestnet’s, you know, platform offering, right, when the advisor hits their landing page, they have access to a multitude set of solutions, they can go launch MoneyGuidePro to do planning, they can launch eMoney, they can launch SIMON to get structured notes, they can then launch through the insurance exchange to get access to annuities. So it’s really that, getting them in and then letting them go and figure out what, based on client risks, how do I build that portfolio, and then aggregating all of that data back so that, you know, in my eyes, the homerun ball is really a single point for that portfolio management. Right. So the structured note comes back in, the annuity comes back in, and that client who has one portfolio and one advisor, everything now is within one platform and ecosystem that the advisor now has full line of sight across the entire client relationship.

Jack Sharry: Gotcha. So probably not yet, but maybe what’s going to happen is that annuity will be part of a household-level portfolio. I imagine there’s more to work, but fill me in. How does that all work in terms of what we have today and, frankly, where I think we’re all headed, which is really a fully coordinated and comprehensive approach.

Rich Romano: Yeah, and I think we’re very far down the path of where you just said we think we’re heading, right. So we’ve done the work that really looks at annuities, like we had talked about, right, in, it’s a risk-constrained portfolio. So, you know, indexes and crediting strategies inside of annuities, right? The problem was an advisor would pick an annuity, and never get the benefit of what they were buying. Right. So they bought a fixed indexed annuity that the client put a half a million dollars in that half a million dollars has no downside risk. So they should get the benefit in that… of that much like a 30-year note or a cash, right? So as they’re building the portfolio, maybe they can challenge the higher risk of the portfolio because they know they’ve got that protection in their back pocket. Right. So where we’re going next is objective-based risk, right? Where a client has a goal of income. If you’re buying an annuity with an income rider, do you really care about the sub-account allocation underneath? And do you look at that from an account-based volatility perspective? Or do you say objective risk is more important, so you don’t look through the sub-accounts because the biggest problem with annuities has always been, what are they? They’re underperforming mutual accounts, because no one’s been able to report on it in the right way to show the benefits of the product versus the underlying investments. So, you know, we’re there where, you know, for clients of Envestnet that use the insurance exchange, annuities are right next to the SMA, or the UMA, or the mutual fund and ETF account. And that household has all of those accounts, including reporting now on the annuity inside of that household,

Jack Sharry: It sounds like what I can do is I can get a household view, I can see all the products I own, I fully understand all the challenges of what you describe in terms of how you measure the risk, how you report on the risk, and how that impacts the overall portfolio. So I imagine you’re in process on working all those issues out, there’s got to be all sorts of regulatory and compliance, you name it, kind of issues. Talk about where you are, and also talk about where you see all that going.

Rich Romano: So I think in a lot of cases where the way we’ve built it is from a framework perspective, right? So we have capital market assumptions, right? We have risk scores. And we have carriers who create baseline risk scores for some of these indexes, we present those to the firm, and much like the firm may do, or they may say, I don’t think that’s balanced, I think it’s growth, right, in terms of how they classify certain investment things. We’re allowing the same thing in the annuity. So we’ve built the framework that a firm can now go say, I’d like to use different capital market assumptions. We say great, right? Since we work on that, go do that. Right. But that’s going to be consistent for your firm. So we allow them to take that firm level of view of that, you know. Where we are going, is now we’re really focusing on the opportunity on the data side, right? Because you’ve got all these accounts. And if you listen, and I know, Bill and others talked about this at their summit, it’s all around giving the advisor proactive touchpoints to work with their clients to do better, right? So where are their opportunities in the portfolio to do better by the client, whether that’s maybe a new insurance product because they have no protection in the portfolio. Maybe it’s, they’re now 70 years old, and they don’t need an income rider because their income, they’re going to be okay. So move to a vehicle that just offers additional tax deferral. Those are the things that we’re looking at, which are, how do you continue to optimize? So it’s really a dynamic optimization conversation versus a, let’s set the plan in stone and move and just stick to that plan. Right? So how do you dynamically respond to changes in lifestyle or life events or what’s going on in the market, knowing that some of the products have issues around surrender charges, other things, but, you know, we really are seeing, Jack, what’s interesting is the industry runs about 95%, commission based annuities and 5% fee-based, we’re running at 99% fee-based and 1% commission. And our ticket sizes are 2-3x what the industry is, so we know that managed account money is moving into fee-based annuities for the benefits that they provide.

Jack Sharry: Wow. That’s a shocker. I’m thrilled to hear it. It’s good for our industry at large and also good for the insurance and annuity industry and for clients. Frankly, as you well know, and preaching to the choir here, but consumers actually like what annuities offer, they just hear it’s expensive. And so I know as an industry, it’s really embraced the notion of fee-based and therefore either low commission or no commission. But one of the things that, where I want to go as that, as that move is underway, talked a lot about risk, annuities… many different styles of annuities out there, but many offer tax advantage. So how are you winding that into the equation because there’s risk and tax are two ways to not only improve outcome but to get people comfortable with what they’ve bought or what they own?

Rich Romano: Yeah, and so you know, so from our perspective, we work with like planning tools, like the MoneyGuides of the world to show how these strategies that annuities provide fit into the planning tools. We’re working with some other ones around like kind of dynamic allocation. Where we haven’t gone is saying, you know, how does this fit into a tax overlay strategy or tax efficiency strategy. The opportunity to get, to your point, Jack, right, to get more annuities out in terms of the consumers who truly need them. If we focus on the core set of benefits for the average annuity consumer, right, looking at income, looking at protection with some market exposure, like with RILAs or fixed indexed annuities is so ripe just evangelizing there, you know, and honestly, we’re trying to re-educate the masses, the fact that there are a lot of myths, but there was a lot of, you know, product design has changed. They’re not brick walls anymore, that you don’t know what’s on the other side. Right. So I think the industry has moved to understand the fact that you couldn’t just take a commission-based annuity, strip off the commission, and say you have a fee-based annuity, right? It has to act and feel like a very fiduciary managed product.

Jack Sharry: Yep. And where do you see it all going? What’s down the road as all of this comes together, as things become more efficient, systems become better, data becomes more freely available? What’s your view over the next five years, say, where does this all lead?

Rich Romano: I’m a dreamer, right? And I’m an optimist. That’s why I sit in my chair. I believe that we can take the industry to a paperless industry, right? I believe that where we will get if you look at the inefficiency in the… right now, in the way the business is done, right. You have a tremendous amount of NIGOs, not in good order. Right.

Jack Sharry: Right.

Rich Romano: Which is the advisor fills out paperwork, and they say try again, right? That NIGO leads to a lot of what we call no goes, right, which is walk away. So by increasing efficiency at the carriers and creating a better operating model, you start talking about things like recapturing stuff that walked away, right, recapturing revenue. So it’s not about just being a technology provider that’s looking for licensing fees, it’s about bringing the industry to where it needs to go, right? Better data, consistent data, data that reports on the benefits of what the annuity is providing to the end client, recommendations about how to best use these products and the products you have, are they still the right products where you are? And once again, reducing, I think there’s a lack of connectivity, right? In the insurance industry, it’s very siloed. I have a research place for variable annuities, I have an account or entry platform, I have multiple ones, there’s never been connective tissue, right, to bring it all together that creates one single value chain. So I do believe that, right, we can get this to where we also can bring creative new advisors to the table because we now are showing that there’s proof there that says, you know what, A, these products aren’t just about Armageddon, right, and protecting me against really bad, significant events. They’re part of having clients achieve goals. So we believe getting into that RIA space, you’ve got to do that through education of what they are, you just can’t say, let’s just go attack them with wholesalers and get that done, right? We think it’s wider adoption. It’s making the market grow creatively based on new advisors, and then also creating advocates, right? People that, a lot of advisors, like you said, the client knows about annuities, they may drag their advisor to the annuity well and make them get them annuity. But getting advisors to where they start doing three to five annuities a year, you see that it goes up like this because then they finally realize what they do for their practice. And if you can do it in a way where it takes 30 minutes to complete an application versus five days, it becomes a more attractive annuity, because everyone compares to the, buy the CTF, and voila, the trade is executed, right. The industry will never get there without dramatic changes in regulation, but we can at least make the process more efficient and easier. That’s great. So, Rich, this has been terrific, really enjoyed our conversation. It’s great to see our industry firing on all cylinders that includes annuity and insurance with a lot more to go. So as we look to wrap up, what are three key takeaways you’d like to share with our audience? Our mantra is we’re making everything smarter, faster, and better. So we are simplifying access and making access consistent to annuities inside of the wealth management advisory space. We’re minimizing and eliminating errors and accelerating processes. The bigger pieces, we’re integrating these, we’re bringing annuities to where advisors do their business and how they do their business. So being a part of an ecosystem where they already work. And then the last one is, you know, is getting past and solving for that lack of integration amongst advisors and carriers and firms and making an annuity truly a seamless addition and an essential building block to portfolios for everyone.

Jack Sharry: That’s great. So, this has been educational. I’ve learned a bunch, some things I did not know. Thank you for that. Now for my favorite question that we ask on each of our podcasts. So, what do you do outside of work that you’re excited or passionate about that people might find interesting or surprising?

Rich Romano: Two things. I’m a foodie, I love to cook, I love to eat. I got a book that has the top 150 restaurants to go to before you die. I love checking them off the list.

Jack Sharry: That’s great.

Rich Romano: And I’m an avid fisher, right, a fisherman I love to fish. I’ve fished many locations in the world. I live in southwest Florida. And there’s nothing better than getting on the water, getting away from everything with no cell phone, bringing fish home to the plate.

Jack Sharry: That’s great. I love it, and cooking it. So, Rich, thank you. This has been really an interesting perspective. I really appreciate your insights. For our audience, if you’ve enjoyed our podcast, please rate, review, subscribe, and share what we do, are doing here at WealthTech on Deck. We’re available wherever you get your podcasts. Thanks again, Rich. This has been a lot of fun. I’ve really enjoyed it.

Rich Romano: Thanks, Jack. Great time.