Zephyr Financial Solutions

Storming the Castle: What Warren Buffet taught us about moats

Moats are static and history is filled with stories of well-fortified castles that fell to conquerors who simply redesigned their tactics and enhanced their weaponry.

digital transformation

“The most important thing in evaluating businesses is figuring out how big the moat is around the business,” prophesized Warren Buffett to a 1991 audience of Notre Dame faculty and student. In 2007, Buffett again reiterated “moats” in Berkshire Hathaway’s annual letter to shareholders, “A truly great business must have an enduring ‘moat’ that protects excellent Returns on Invested Capital.”

It’s difficult to understand how an archaic, medieval strategy - essentially a ditch filled with water and perhaps the occasional alligator - could have been resurrected as a metaphor identifying a company’s sustainable advantage. Moats are static and history is filled with stories of well-fortified castles that fell to conquerors who simply redesigned their tactics and enhanced their weaponry.

Buffett’s 2007 letter to shareholders would coincide with a seismic shift in the mobile phone marketplace that giants like Nokia and Samsung failed to see over their wide, vast, seemingly indefensible moats.  The January 2007 announcement of the touchscreen iPhone at MACWORLD and Google’s unveiling of the Android open-source platform in November 2007 showed the power of the newly emerging “digital” moats that would not only neutralize traditional moats, they could adapt quickly to market changes and conditions.

Apple and Google would ride the growth trajectory, while helping to reshape consumer behavior, entering the market not as competitors, but as innovators – Apple with a touchscreen and Google with Android, the first open-source operating system.  

How does this relate to the wealth management and financial services industry?

Just two years after iPhone’s launch, the Aite Group looked to the wealth management industry to determine whether the mobile technology was a natural fit for the market. Across 201 US-based financial advisors, 62% had overwhelmingly expressed interest in the digital experience.

From Apple to the Advisor, the breakdown of traditional moats [within wealth management] began with the disruption of the iPhone, and its cascading impact across consumer technology and shifting consumer expectations towards the total user experience. 

Creating digital moats around a business model has always been about integrations, both internally and externally. These digital moats offer wealth management firms the in-house capabilities to persist through natural disruptive changes that ebbs and flows with the pace of technology. For an exemplary standard for in-house digital moats, look no further than Merrill Lynch.  

Merrill Lynch formulated their digital moat strategy and success in 1999 by shaping the industry through custom technology offerings with the origination of Direct Markets, a group focused on distributing Merrill’s research and investment advice over the “World Wide Web.”

Since the early 90s, from Merrill Lynch, HSBC, to the rise of Bloomberg for business data, digital moats provided an enduring competitive advantage that has allowed them to cost-efficiently scale as market conditions adapted and changed. Technology became the conduit to possibilities with integration of other solutions now critical to responding to client expectations.

By April 2000, the late and deeply honored, David Komanksy, then Merrill’s chairman, sought to establish a financial services empire through the internet. Merrill Lynch partnered with HSBC Holdings to offer online backing and investment services throughout Europe and Asia. Behind such partnership, Merrill committed to spend $500MM over five years on its half of the venture. Such measures, during the 2000’s, were the first international internet banking and digital investment services. Twenty-One (21) years later, Merrill Lynch, its investments and wealth management aspirations have stood the test of time.

For the modern independent RIA segment, the best way to begin the digital moat strategy is through integrations and the proposal generation process. From there, considerations ought to be given towards CRM connectivity and building up a strong client database to drive proper relationship analysis. For proposal generation, Zephyr’s financial solution proves incredibly flexible and highly integrated into the CRM, notably Salesforce Financial Services Cloud. Last December 2021, Zephyr announced a partnership with AppCrown, an industry integration platform provider that connects Zephyr’s financial solution into the Salesforce Financial Services Cloud and other Customer Relationship Management (CRM) systems, making it possible for wealth managers and financial advisors have their digital moat, and strengthen the proposal generation process. Credit to Informa’s division head, Zephyr can now deliver more enhanced investor experience that drive value perception. Zephyr also resolved custodial integration and accounting system challenges with an integration partnership with Digital Financial to remove the traditional barriers of fully access and transfer client financial data and portfolio holdings.

“Integrations enable independent wealth management firms to bring data together in the form of modern low-cost and highly verticalized solution,” says Christopher Volpe, head of Informa Financial Intelligence’s Zephyr division. “Traditional approaches to collating data can be time-consuming and has more potential for error. With modern APIs and the potential to tap into turnkey integration vendors like AppCrown and Digital Financial, we are able to deliver real measures for our clients to create an enduring digital moat and deliver real value to investors.”

Real Integrations - Real Digital Moats
With a nearly two-decade technology advantage, compounding every year with new capital investments, independent RIAs and smaller wealth management firms focus for 2022 should be to formulate and establish their digital moats. But how?

With great plans comes great questions, so here’s three considerations for building up the digital moat through integrations:

  • Which system and data points were used to “win” the relationship?
  • How is your firm utilizing households, beneficiary, and investment holding data to service relationships throughout the year? 
  • What is the data needed to support these critical front office operations [e.g., proposal generation tools] and middle office operations [e.g., compliance administration]? 

Crafting the digital moat game plan using integrations can enable immediate differentiating capabilities:

  • Identify the proposal generation process and the data to support the client from proposal generation through the First 90 Days with the firm.
  • Identify the investment data, historical holdings data, and historical beneficiaries’ data necessary to support retirement KPIs.
  • Identify the data from vendors that is material to winning the relationship, maintaining the relationship, and growing the relationship.

Establishing these three key data elements creates the list of “integrated data” requests from existing vendors that the firm will need to begin creating digital moats. Obtaining the digital moat requirements is crucial to the subsequent step of crafting the “how to win” tasks and play into operational workflows where a digital moat will begin building a “perpetual relationship profile” for the firm, helping any wealth management firm compete, on par, with larger would-be competitors.

tag: Wealth Management Trends

About the Author


Franklin Tsung, Brimstone LLCBrimstone is the leading tactical LP for sponsors, utilizing proprietary technology assets to co-invest and optimize private equity investment returns. We seek to build original investment themes through original insights that support our innovation approach across private companies while maintaining long term value for sponsors, the companies we organize with, and the industry in which we work. Since 2013, Brimstone LLC has participated in over $50 Billion of processes. Our approach to innovative private investing is scaling through an integrated focus, helping acquired firms succeed with original go to market strategies within a few months, while maintaining operational leverage.  brimstoneprivate.com