SMArtX Technology

From Potomac Fund Management, this is the Conquer Risk Podcast. Join us as we discuss the business of running an RIA firm and the practice of investment management. And now, our hosts. Welcome to the Conquer Risk Podcast.

My name is Manish Kada with Potomac Fund Management. I'm pretty excited today to have Evan Rappaport on from SmartX Technology Solution. SmartX or SmartX? Which one do you like better?

SmartX Technology Solutions. And here's why I'm pumped, because I've seen the software. I have tested it, I've used it, and it's killer. It's something in the industry that I think a lot of people should take a look at.

So I asked Evan to spare 10 minutes of his day to come and talk to us about the technology, what makes it special, and how advisors will benefit him from this technology. So with that being said, just give us some background on SmartX, like how you got to where you are today. Sure. Yeah, so we actually didn't come out of the traditional RIA space.

We came out of the hedge fund side of the business. And what we were trying to solve for initially was, that after the financial crisis, our clients wanted access to those products, but in a separately managed account. Because they were in hedge funds, right? And being in hedge funds, they were locked up, gates, there was fraud, there was theft, there was style drift, there were side pockets, there were all of these unexpected consequences.

And the separately managed account alleviates those, right? So we in turn went back to our hedge fund managers, and we said we have clients who want separately managed accounts, and they said, great, $50 million, $100 million. Because for them to manage a separate, very difficult, right? So we had to come up with a solution, self-servingly, we got paid to bring money in the door, and we came up with this technology solution that in essence makes those strategies without getting too deep, work within the SMA UMA construct.

So we support long, short, short, only option-specific market neutral covered calls. No one in the SMA UMA space supports those strategies. It's very complex. We're difficult to do that.

But that's how we kind of got into this space. And once we got into this space and released the product, we want a bunch of FinTech awards, and some of the larger firms came to us and said, we love your technology. We see application to be able to employ this for long-only strategies also, because what you're doing is very different in the TAMP space. Now, you know, it's crazy.

We didn't know what a TAMP was, right? We didn't come from that space. And so we recognized that the technology we built had so much application, so many different ways we could utilize that to not only bring long-only to the market, but do so in a more contemporary way. Well, listen, to interrupt for a second, I think that's what makes the technology so special, because from my point of view as an investment manager, we don't trade intraday or do too much exotic trading, but people don't realize that some of these other platforms, not only are you limited to end-of-day trading, you have to execute it by a certain time.

And so you can't inter-trade, even if you wanted to. And so what that gives you is vanilla strategies, and there's nothing wrong with that if that's how you want to run your practice. But if you want to combine these different strategies, this type of technology needs to be in place. And that's what, when I went through it, and started messing with it, that I was blown away by.

One of the things I'd like to address is sort of the sleeve level aspect of it, because I think that's extremely unique to SmartX and maybe the only technology solution that has that. Yeah, so thanks. So we, as a result of building the technology from the ground up and not knowing what a TAMP was, we weren't tainted by the existing unified management accounts technology and structure and architecture that's out there today. So one of the unique features within SmartX, and we'll talk about, there's a number of them, but is that we keep the investment book of record at the sleeve level.

Nobody does that. They keep their book of record typically at the account level, and then they'll use percentages to figure out, you know, which positions go and which account will do tax law tagging or something along those lines. It's not nearly as clean as keeping the eyebore at the sleeve level. So attribution is right, cash is right, et cetera.

Now what you said about trading is important, right? So when we came into the space, we were dealing with hedge funds. And hedge funds are active. They trade intraday.

You can't trade that stuff the next day. I think about the tactical manager. So we have tactical managers. You trade, right?

And the hard part is that the market is down. Let's say today, the market opened up down 500 points. And you said, you know what, tonight this is a good time for me to go ahead and buy the dip. Yeah.

All right, you did that, right? The market rebounded. Let's say we end up the day flat or up, and tomorrow we gap up 300. Now your TAMP is making a trade the next day, and you're up 1,000 points from where you as a manager made that trade.

That's tremendous dispersion, a lot of slippage, right? And so we real-time trade. Now we build our systems to not only provide real-time recording, real-time entry, real-time exit. You don't have to wait for the next day.

But we also, again, trade in real-time. So we build our trade handlers in such a way that they'll see you make a model change. The system will prepare the order for our trade desk. We don't just send orders into the market.

That's ridiculous. And I think what makes us special is that we really are careful about our execution. I have my Series 55. I've got a number of securities licenses, but I ran markets, and I'm not going to let our clients get scalped.

Meaning that if you put through a trade and you've got 100,000 shares to buy of XYZ security, and that trades 50,000 shares on average. I'm not going to send a market order in. We're going to get scalped for a point or two. So our systems have machine learning built within, and it will send our trade desk a signal, green check, red check to simplify.

If it's got a red check, that means the order needs to be reviewed, and it could be that it is a liquidity constraint, for example, and we'll work that order. So that's where we're a little bit different. One, we're fast on average about one minute into market. So minimal dispersion.

Two, we're not going to send market orders into the market unless it's security that can take that and our machine learning understands that it's apple or city or something like that. And we're going to work that we're going to use your trade desk, we're going to use an algo, we're going to do our best to get that order executed at the best possible place. One thing I want to mention that is unique, at least during the due diligence process. I remember getting the due diligence, and my initial response was what the fuck.

And Jennifer in my office was like, I don't want to fill this out, and then they want to do background tracks, and I didn't know you guys. So at first I'm like, who do these people think they are, because it doesn't come across. And I was having a conversation at the bar yesterday, and the guy was like, you know, I don't know if I should have my own due diligence or rely on SmartEx. And I said, listen, you do whatever you want, but from my perspective, they ran background tracks.

We had to fill out multiple pages of information, monthly returns, skips, compliance, all that stuff. You want to talk quickly about your due diligence on managers and how you approach that aspect. So one of my license is in my series 24. I'm a compliance officer.

I was a compliance officer. I still wear that hat. We own a broker dealer, and we own an advisor. So when we're talking about hedge funds specifically, I don't trust anybody.

Justifiably. So that's what we started. We've always done a lot of due diligence on hedge fund managers, and we carried that over to the long only space, because why shouldn't we? There are firms that we've interviewed that we've interviewed to come on the platform, and we've done the screen, and they haven't passed the screen for numerous reasons, and they're on other platforms, and people don't know that.

So what does our due diligence process on the upside entail? Forget the investment due diligence for a second. So one, you have to be clean. No marks on your license.

You can have clerical errors if you, again, made a mistake in terms of your timing. But you can have this pricing of bonds, soft dollar infraction, or SEC suspension, no way. Now, the lawyers firms, we have to give a pass. Black Rock, Morningstar, they've been around forever, they're going to have some marks.

We understand that. We will get a letter from them, though, telling us that there's nothing pending. So we're very tough there. Background checks.

We're the only firm to do this. You referenced this, right? So credit, criminal, regulatory, all key principles. I tried the record.

I didn't like it, but whatever. No one does. And I've been in the business 30 years. I managed $30 billion.

No one's ever asked me to do a background check. Well, you know what? There was a guy who was the head of the NASDAQ. Do you remember that guy?

He starts with an M, ends with an F. So I don't care how long you've been doing this. I want to know that you're clean, and we're dealing with people who, again, are ethical, have high morals, et cetera. Credit checks, by important.

It's all part of that. We see bankrupts. If you can't manage your own money, gold expression. What else do we do?

So we do the background checks. We do ADV reviews. We do quarterly reviews on those. We require the gifts on it.

So we're not just going to take anybody's information off of Morningstar. That's crazy. I actually sold one of my initial hedge fund databases to Morningstar. I would never take that data at face value.

You post your own data there. You post whatever you want. Don't be jacks. So hypothetical returns.

No. We only products that are on our platform are not audited or indexes. So we want to talk about that. That's not the rules based.

That's what I call that out. But we do disclose that specifically. If you're not comfortable with that, don't invest in the law. So a manager comes to you, launches a program in 2015.

Highs hypothetical is back to 1993. Not on the platform. There's a blog post on our website, and I think it's labeled hypothetical. It's hogwash.

It was bullshit, but I was forced to change it. But the point is, I've seen so many other platforms where they come out. It's two years worth of performance, and they're back testing back to the early 90s. I mean, come on.

We've seen this. F squared. Right? What's on our bodies platform?

Remember these larger tabs got hit? How did you not catch that? They're still doing it. I mean, the largest broker dealer platforms out there.

We're losing, sometimes we lose an account. And I try to follow the rabbit hole. And I find out it's a manager who's hypothetical for 30 years and one year of real traffic. Here's my, here's how easy this to uncover fraud.

We need your audited returns. We don't have audited returns. Thanks for your time. That's it.

If you come from the hedge fund world, like I come from, it's not that difficult to find fraud, or at least to keep yourself away from companies that potentially could be fraudulent. Audits, admin statements, monthly accounting, yearly accounting, et cetera. These are important. So we carry that same mailbox.

It's easy to create. I mean, I created a fixed fact sheet called the Potomac dollar portfolio. It stands for do not use hypotheticals. And I use my software and I program the hypothetical and in 30 minutes I created the fact sheet and it was phenomenal returns.

That's your up and away. And it was just made up. So, okay. Moving on.

One thing that I want to clear up because I was confused about it. I want you to explain sort of the relationship with Black Diamond, SSNC, how it's all intertwined and how it's not related at all. Great. Thank you.

So a couple things to understand about us first. We design and build unified managed accounts technology. Most of the other firms that are out there are actually licensing someone else's technology. They're licensing Vestmark.

They're licensing in VestNet. Whereas with us, we were uncomfortable with the technology within the unified managed account space. The architecture hasn't changed since Lockwood in the 80s. And you couldn't handle the strategies that we put brought forth if you continued to operate in that way.

So we literally ripped it down to the studs, rebuilt the entire structure using microservices architecture, which is the most advanced API structure you can have. Literally every single piece of data that comes out of our system is driven by an API. So it's very contemporary in that way. And we take that technology and we can employ it so that other firms can build platforms on top of it.

We become that engine on the inside. But what that allows you to do as a brokerage firm, as an advisory firm, is have a system that's modular, flexible, extensible. So you've got a lot of customization capabilities to the extent where let's say you're an aggregator and you want to have one group that's paying 20 basis points and one that's paying 25 basis points and one that's paying this for a strategy. And one that only has access to these strategies versus these strategies.

You have all that customization capability. Now getting back to SS&C, we built them a platform. SmartX is a white branded solution that we built for SS&C Advent. It is the only integrated solution for black diamond.

And you are able to get sleeve level detail in black diamond next day. If you use another system, one of the other TMs, they're going to get a custodial feed. Advent doesn't take a custodial feed. They take sleeve data from us.

So you're just seeing one big lump of securities in black diamonds first. I think that's important. Because if we simplify this, when a custodial feed comes in, then the tamp on their level will then separate all the transactions based on their household level, the account level, sleeve percentages and whatnot. Where you guys are actually sending the sleeve level breakdown to black diamond.

That's right. That'll happen in their own reporting. But if it's black diamond and it's investment, for example, they're just going to get the custodial feed. When they get the custodial feed, it's just going to show all the security.

You'll have no idea who they're assigned to. There's no delineation. There's no performance recording. So you can't use the tool in the way it was designed in all the features and functionality.

Now you can use black diamond to its full extent. Black diamond is not an inexpensive product. It's platinum standard, right? High-end reporting solution.

But I do want to be clear. We work with all reporting solutions. We have clients on Ryan, on Adapar, on Tamarack, and that's fine. But if you want to use black diamond, we have got a great solution.

I will add to that, one of the unique benefits of the black diamond relationship is that if you use smart X and use black diamond, you don't pay for black diamond. That's huge. Because as you as an advisor, you might come out of pocket $50,000 a year for black diamond. And now it's included.

And it's a usable product. Within black diamond, everybody wins. And more than likely I'm going to be less expensive than the other Tamarack. So it is win-win-win.

You're going to win. The client's going to win. It's not like we're charging you extra in and giving you the technology and passing that cost onto the investor. Oh, no.

We want everybody to benefit. And that's the structure we put forth. Yeah, in full disclosure, we use a bunch of Tamps, including smart X. And one of the reasons I wanted to do this is because you come from the hedge fund world.

When we sat down, I went to your office in West Palm and I started looking at how you were doing the reporting, how you were combining these strategies. And it hit me right away that you came from an investment background versus the other way where some Tamps come from a different background and try to squeeze it all in. And it made a difference. If you want those strategies, if you want vanilla strategies, maybe it doesn't matter to you.

All right, closing note. What are the things, I always ask this, what do you regret? Since you've launched smart X and she's got to go, what's the biggest regret that has come across your desk that you could change if you wanted to? Maybe doing things a little bit quicker.

Sometimes you're driven by client demand and that's not always the best way to build. You've got to be client. They're looming. If you can do this, we'll bring the business on and you move your roadmap around a little bit.

And so you end up focusing on a piece that's right for this client, but wasn't necessarily important to the other third one. They got it in their hand. But I'd also say it's important, if you don't mind, just to understand the high level, just some of the differences between what we do and the other guys do. Because they look at the smart X and they say, well, it's just like the others.

What are the major advantages of a smart X versus a group of other Tamps? So if I had a name, sort of two or three unique properties within smart X, first would be the breadth, which we kind of talked about strategy. So you have all the also we talked about long short, short, only option specific, market neutral, covered calls, traditional long only strategies, tactical strategies, and direct indexing. We brought direct indexing to market first before everybody else kind of got hot on this and that we work with.

Let's see Russell, Thompson, Reuters, MSCI. All the big index providers, we make their products available. You can customize, you can do screens and tax loss harvesting and exclusions and such. And so you have a wide breadth, active passive hedge, one account.

You've more durable portfolios, by the way, theoretically, right? You've got the API, so you can customize the platform. We've got some clients who don't even use the front end. They build their own technology, their own platform that includes CRM and planning on top of smart X.

And now they've got a platform that they go out and sell, which is wonderful. So the APIs are important, a lot of customization capabilities, real-time. So you referenced it, right? Nobody in the SMA UMA space has ever provided real-time performance information, real-time entry, real-time exit, real-time trading.

And like we've talked about, that can be critically important depending upon the type of strategy and your objective. So that's another black diamond integration, open architecture. We're not closed. We're all API driven.

I can plug in whatever you'd like within this platform. If you want XYZ CRM, you want XYZ planning, et cetera, we can put that all together for you in a single solution. And so that's another unique benefit. And of course, the black diamond and the fee credits that you get there are black diamonds and other big benefits.

So there's some of the differences in the last piece, which you referenced on the sleeves. Everybody wants the sleeves. And a lot of firms try to do sub-accounting. Sub-accounting is a mess.

It doesn't work. And those that have gone out there and try to, you know it doesn't work. And so having the benefit of those sleeves and being able to utilize the data appropriately, and you as a manager understanding, exactly what your cash is and not having to worry that that that number is moving around is important. Absolutely.

Two things. I appreciate you. Thank you for being on. Where can people learn more about SmartX, reach out to you and talk?

Sure. So smartsadvisory.com is the website. We're going to do a website, Google Search, right? Or you can call us 561-835-8690 is the office.

What's your Twitter handle? Evan Rapp. Not.com. Evan Rapp.

EVAN RAPP. The real Evan Rapp Report. That's his rap name too, right? Yeah, he rap.

The other Evan Rapp Report is, I've got to work for Google and apparently his guy. You don't take that name much further. You got to love our cloud. All right.

That's it. Thanks for joining us. Thank you. Thank you, Manish.

Thanks. That was good, man. All opinions expressed by podcast guests are solely their own and do not reflect the opinions of Potomac Fund management. This podcast is for informational purposes only and should not be relied upon for investment positions.

Clients of Potomac Fund management may maintain positions and securities discussed in this podcast.