Our whole world is currently being changed by technology. From smart appliances powering our homes, to the apps and software that help us manage our daily tasks, to the rise of autonomous vehicles that may eventually reshape how we travel... change is all around us. Yet, while technology has come a long way over the past few decades, the unfortunate reality is, for financial advisors, our technology solutions have lagged other industries.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss how it has been the advisory industry itself that stifled its own #FinTech innovation, and how our industry's structure and standard practices have caused advisor technology to lag so far behind other industries.
The first problem in the financial advisor marketplace is that we are incredibly fractured. By some estimates, anywhere from 80% to 90% of advisory firms are either fully or quasi-independent, which means that it is really hard for advisor technology firms to gain traction when they have to sell to each firm one at a time. Advisor tech firms do have the option of going through independent broker-dealers and custodians to try and reach a critical mass, but even then, the reality is that advisors aren't forced to use new technology, so firms must still convince advisors that adoption is worth the time and hassle... which is not a strategy that generally leads to fast adoption!
This dynamic wouldn't be so problematic if advisor tech firms had a good way to reach advisors en masse, but unfortunately, they don't! The most logical way to try and do it is to reach advisors through conferences as an exhibitor, but even this isn't feasible for most startups given the high cost of renting a booth at the typical advisor conference. Because the reality is that these startups must bid for booth space against huge financial product manufacturers (asset managers, insurance companies, etc.), which ultimately prices most startups out! And this dynamic is unfortunate not just because it means it's more challenging to launch new advisor tech firms and develop great technology, but also because it fills exhibit halls with companies that sell through advisors (to reach our clients) rather than selling actual solutions to advisors, meaning that advisors have little interest in talking to most exhibitors anyway!
The last problem worth acknowledging is that enterprises, such as large broker-dealers and RIA custodians, arguably control too much of the development of advisor technology. That's not to criticize these companies necessarily, but the reality is, they're in the business of getting and investing client dollars, which means that software they help develop ultimately focuses too heavily on those activities (gathering assets and selling products) rather than real financial planning advice. Thus why financial planning software hasn't developed great budgeting, cash flow, debt management, or dynamic retirement models; because ultimately, those are important for delivering advice, but not very relevant in gathering assets and selling financial products. Yet, to reach any level of scale, advisor tech companies have historically needed to work with these companies, but as they do, they become beholden to the enterprise companies focused on the old way of doing business, and innovation that would provide real planning value gets stifled.
The good news is that things are starting to change. Venture capital firms like Vestigo Ventures, which is specifically willing to fund startup advisor technology solutions, are beginning to emerge... companies are finding ways to grow through independent RIAs and pivot to enterprises and scale up... conferences are beginning to adopt more flexible exhibiting pricing that opens the doors to startup companies... and even some enterprises are becoming more flexible in their approach to advisor technology. But ultimately, the combination of these factors is why advisor technology has lagged, and we have not seen the technology growth that other industries have experienced.
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
Today, I want to talk about FinTech for financial advisors. Specifically, the financial technology that we use, as financial advisors, to run our business. To me, one of the major challenges for the advisor community right now is that our technology solutions have lagged other industries.
I'm not trying to bash any advisor technology firm in particular, but just make a simple acknowledgment that our tech tools for financial advisors are not nearly as well-developed as they are for a lot of other industries. That's why I think the emergence of robo-advisors a few years ago caused such a stir in the industry. It wasn't that the robo-advisors were a threat to us (they're not), but I think a lot of advisors saw that technology and said, "Wow. That technology makes my technology kind of look like crap."
Roll the clock back a couple of years ago, when Betterment and Wealthfront first arrived on the scene in 2011, 2012 and offered the smartphone app where you could open an account, transfer money, fund the account, and actually be invested in about a half an hour. And, for us, as advisors, we had to have the client complete physical paperwork with wedding signatures. And then, in many cases, we still had to fax the paperwork to someone in a platform that would process it by hand.
With the robo-advisor, your account was funded and invested in half an hour, and our typical advisor process was, "Well, Mr. Client, we're going to do our best to get this done quickly. So I think, in about two weeks, we should have that ACAT transfer done and be ready to invest." And robo-advisors got it done in half an hour. It was embarrassing.
Fortunately, our ability to handle digital paperwork and e-signatures at least has gotten a little better over the past five years, but I think our technology overall is still lagging badly.
New Venture Capital Firms Funding Advisor FinTech [Time - 1:46]
So, in that context, I'm here today at Boston Logan Airport.
I was actually speaking this morning for a DoL Fiduciary Training Event for financial advisors, with the Massachusetts Securities Department. Then this afternoon, I met with a firm called Vestigo Ventures, thus the double-V hat here, which is a new venture capital firm investing in early-stage FinTech firms, including technology providers that actually serve financial advisors.
The sad thing is that Vestigo is actually pretty unique at this point in being willing to invest and help incubate early-stage FinTech companies serving financial advisors. There are really surprisingly few venture capital firms really willing to invest into advisor-tech startups. So Vestigo is out there. FinTech Collective in New York, which was an early investor in Quovo and now Vestwell, SixThirty in Saint Louis, which funded WealthAccess and Upside Advisor before it was acquired by Envestnet. But with over like a hundred FinTech venture capital firms out there, that's a pretty short list. And this is despite how hot FinTech is for venture capital right now.
I think the problem, from our industry perspective, at least, is that most of the dollars are flowing to B2C FinTech companies, and basically they all are hoping to be the next Facebook-style breakout with consumers that can IPO for billions of dollars some days. In the meantime, our financial advisor marketplace languishes because, while you can build a successful FinTech company serving financial advisors, realistically, few are ever going to be large enough to be billion-dollar companies. You know? In the sad pecking order of venture capital firms, the idea of building a mere $100-million company in the financial advisor tech space is considered small potatoes and not worth their money to a lot of venture capital firms.
Still, fortunately, there are more and more success stories of advisor FinTech firms that are getting created and grown and sold and generating a good return on capital for their investors. I think it's starting to shift this.
Back in the day, Schwab bought Portfolio Center. TD Ameritrade bought iRebal. Fidelity bought eMoney Advisor. Envestnet bought Finance Logix. Morningstar bought TRX (Total Rebalance Expert). And, of course, Envestnet and Morningstar, themselves, are basically advisor technology companies that grew to become publicly traded companies.
The more successful examples we get of advisor-tech companies that create real value for early investors, the more investor dollars are getting attracted into our world, including companies like this, like Vestigo. But notwithstanding this trend. I think it's worth recognizing that a lot of the gap in our support for advisor-technology problems isn't just a lack of investor capital coming to support growth ideas.
The other problem is simply that our advisor community has actually created a lot of roadblocks that have stifled innovation for ourselves. I'll give you a couple examples of this.
The Fractured Financial Advisor Marketplace [Time - 4:56]
The first problem with the financial advisor marketplace is that we are incredibly fractured. Zillions of small businesses... By some estimates, anywhere from about 80% to 90% of all advisory firms are either fully independent or at least quasi-independent on an independent broker-dealer or similar platform, that's a solo advisor or maybe two or three partners, which means, as a FinTech firm, it's hard to reach them and to gain traction, because you have to get to them one advisor at a time.
It's brutal. It's a serious marketing challenge for those companies. Now, one alternative for new startups is starting to go through the independent broker-dealers to reach critical mass for financial advisors, but the problem is that, even amongst the independent broker-dealers, they actually have limited ability to really force advisors to use new software tools. BDs can deny advisors from using outside software, but they can't necessarily force advisors to use new software, in many cases.
That means that even if a FinTech company gets their foot in the door with an independent broker-dealer contract, as an enterprise, they still have to convince the advisor on the platform to actually adopt the software. And it's tough to reach that point even because, unfortunately, independent broker-dealers are often slower at adopting new technology. I think this is, in part, just because they're larger firms.
Additionally, it's more complicated to adopt something new and slows the process down and, in part, because the regulators now are putting so much scrutiny on broker-dealers, from a cybersecurity perspective, that they've created very stringent evaluation vetting processes to kick the tires on new providers and their cybersecurity capabilities. It just grinds new adoption to a near-halt.
The alternative course is going to purely independent advisors, the independent RIAs, but the independent RIA community is even more fractured with, virtually, all of us as solo advisors or small partnerships of a couple of advisors. So that means if a startup wants to grow 1,000 users, they need 500 firms, one advisor at a time.
The Exhibitor Inequality Of Financial Advisor Conferences [Time - 6:52]
The fact that you have to reach independent advisors one at a time wouldn't necessarily be problematic if there was a good way to reach them in mass. But, unfortunately, there's not. And the most logical way to do it, which is through financial advisor conferences that bring together a large number of advisors at once, isn't feasible for most startups.
The problem is that, historically, the companies that exhibited at financial advisor conferences were companies that manufactured financial products, so asset managers making mutual funds and now ETFs, insurance carriers, annuity companies, REITs, etc, and some of the intermediary platforms that advisors work through, such as broker-dealers and RIA custodians trying to attract advisors. These are big companies.
As the saying goes, "There's a lot of money in the money business." Financial services product manufacturers are mega companies. Yet, for most financial advisor conferences, they make no distinction between companies selling financial products and companies offering financial advisors solutions, to us, as advisors. In other words, American funds, with their trillion dollars of AUM, Schwab with their $2 trillion of AUM, and a random FinTech startup firm trying to self-fund their launch and get their first few users in their series-A round all have the same pricing schedule (the same exhibitor cost).
It's no great surprise when it's $5,000 or $10,000 for a booth. An asset manager thinks this is cheap. They buy two to four of them at a time, in a big block, while startup companies find them completely unaffordable.
If I'm an angel investor, and I just gave a FinTech startup $50,000 or $100,000 to build their product and get their first users, I'll be damned, as the investor, if you tell me you're going to blow 10% or 20% of all of your capital on one random conference. Good luck getting enough users to justify that.
Now, I'll give some of the RIA custodians credit for trying to improve this. TD Ameritrade has its VO Village, with booths that are at least somewhat cheaper. Schwab has a similar setup for tech vendors. But even at those events, the booths are often so expensive that I know most tech startups actually trying to break out with advisors are priced out, which means their companies never get to launch.
That's actually part of why we made a FinTech competition last year at the XYPN conference and made a separate class of drastically discounted booths, specifically for startups in the business for fewer than two years or having less than $1 million of revenue, because we were trying to open the door to new startups and new innovation.
But sadly, I pounded the table about this for years, and too few conferences do this. Most continue to make their pricing schedule based on asset managers, custodians, and broker-dealers, and then use the same pricing for tech companies, failing to recognize that tech companies have such different size and scale than asset managers, that all of them get priced out. I mean, it's just the difference in the economics. Companies trying to sell through us to our clients should pay very differently because they just have different economics than companies that try to actually provide solutions to us as advisors, where they're trying to reach the advisor marketplace.
The irony right now is that conference exhibitor prices are so high that the only ones who can afford to show up in the exhibit halls are the companies that sell through us, to advisors, instead of providing solutions for us, as advisors. Then, conference organizers wonder why it's so hard to get us to spend any time in the exhibit hall, because all the solutions we actually want aren't there because they got priced out.
But from the context of supporting advisor technology and better solutions for us, when we price out all of the solutions for us, we price out the innovation. We kill the innovation. Startups can't gain traction. I think that's materially slowed our ability to get new solutions in the advisory community.
Product Distribution Enterprises Control Too Much Advisor Technology [Time - 10:30]
The last problem worth noting in the financial advisor technology landscape is that, to the extent that there are enterprises that can buy technology and drive advisor technology solutions, they tend to be focused primarily on those financial services products (e.g., broker-dealers and RIA custodians). I don't mean to bash their companies or business models. This exists on both sides, both the BDs and the custodians.
All of them are built around a foundation of making money when they get our clients money, so either on their platform as a custodian, on their platform as a broker-dealer, or through their broker-dealer products. They have different means of monetizing, but they're in the business of our clients' money, for which we, as advisors, are intermediaries.
So lo and behold, most of the software solutions we get are focused on how to get our clients money and how to gather assets. That's why if you look at consumer surveys, even though debt and cash-flow issues are the dominant worry of the average American, and there are Americans who will pay for financial advice around those issues, but there's no software to help us. Has anybody seen a good debt management planning tool? Or student loan planning tool? Or cash flow and budgeting tool for financial advisors?
There are one or two minuscule startups out there, trying to do it and gain traction, and not one major platform that's doing it because, unfortunately, the enterprises are not built around cash flow and budgeting and debt management. That simply doesn't fit the products that they sell. It doesn't fit insurance products and it doesn't fit investment products, so the enterprises don't ask for those features, and we, as advisors, don't get them.
The case-and-point example is to look at something like estate-planning capabilities and financial-planning software. For anybody who's been in the business for a while, you may recall, fifteen years ago, we actually had a lot of tools to illustrate estate-planning strategies. Fifteen years ago, the estate tax exemption was $675,000, so a huge number of people had an estate-planning problem, and you needed life insurance to fund the estate taxes.
And lo and behold, when lots of people had an estate problem and needed insurance for estate taxes, we had great estate-planning tools. As the exemptions went up, and fewer people are subject to estate taxes, and fewer people need a life insurance product, then the financial-planning software developers stopped iterating on estate planning. Right? People are still dying. They still need to decide how to distribute their assets, but the tools kind of vanished out of the landscape when the product sale that came at the end of them vanished out of the landscape.
Again, I'm not trying to blame advisors for this. I think this actually goes all the way up to the enterprises that we work under because they dictate a lot of the road map of where technology is being built. You can even see this with retirement planning software solutions today. Because, in the end, most of them really just illustrate the benefits of accumulating a giant pile of assets, which is the business of broker-dealers and custodians (to hold and gather those assets), yet no tools to illustrate actual retirement strategies.
If I want to illustrate something simple, like what is the client's financial plan if the client cuts their spending by 10% every time there's a bear market. Not a single piece of financial-planning software today can dynamically illustrate that in a Monte Carlo analysis. There's no reason why you couldn't program it to do it, beyond... There's no demand for it. There's no demand for it because enterprises don't demand it. Enterprises don't demand it because they don't make their money illustrating complex liquidation strategies. They make their money gathering assets and showing people how a giant pool of assets is in their interest because it's in the company's interest.
The end result of this is that major enterprises overwhelmingly dictate the development cycles for financial advisor technology companies, even though the enterprises are actually a minority of the advisor count in total, because they don't actually directly control that many advisors.
The reality for almost any company is that you tend to listen to your big users that pay the biggest check even if you've got a huge volume of smaller users that don't. And the end result is that enterprises built around products tend to dictate financial advisor technology solutions. And for that reason, the companies don't build for real advice. They build the tools that the product companies – the intermediaries – tell them to build.
And I think that ultimately has stifled a lot of advice software tools. For all of you who really like to focus on advice and wish we had more tools to illustrate advice strategies, tax strategies, spending strategies, cash flow, debt management issues – this is why we lack the tools. Because, unfortunately, the companies are building for enterprises that are built around products.
The good news to all this is that I see it starting to change, and new opportunities for investor capital are coming from places like Vestigo Ventures. A growing number of advisor tech startups are starting to at least figure out how to navigate this path, where you start with the independent advisors to gain mass, and then you pivot to the enterprises to scale up growth, and you build a successful company.
At least some advisor conferences are starting to get a little more flexible with their exhibitor pricing structures, to open up to tech companies. Unfortunately not all of them, but at least some of them. If you know a major conference organizer, send them the article I wrote a couple years ago about how to fix the exhibit hall, so that it's actually meaningful for us as financial advisors again.
But at least some forward-looking enterprises that are trying to become more flexible around advisor technology and building things we actually need in order to support giving advice. But the fact that these problems have been present for a decade or a few now, I think, has really driven a lot of the stifling of innovation in advisor technology and why our solutions lag so much.
We'll see how quickly we can start to make up ground for here, as the whole industry shifts, particularly with DOL fiduciary looming. But unfortunately, I think we have a lot of ground to make up.
I hope that's helpful as food for thought. This is Office Hours With Michael Kitces. Normally, 1:00 p.m. East Coast Time on Tuesdays, but unfortunately I was on the podium, speaking at the time, so here we are, a little later in the evening. Thanks for joining us, and have a great day, everyone!
So what do you think? Has the advisory industry stifled FinTech innovation? Have we fallen behind other industries? How do we get companies to provide solutions that provide real financial planning value? Please share your thoughts in the comments below!
III Financial says
Completely correct on the industry fragmentation. I know that my 1-seat revenue for a CRM, portfolio management, or risk tolerance solution is small potatoes to any firm, yet I need these tools to provide quality service.
Thankfully, there are enough vendors with a pricing model that works for me (not you, 10-user-minimum solutions) that I can get the job done well. I’m hopeful that some companies can figure out how to scale and deliver a solution that can be used by the small shops while still remaining attractive to the “big pocketbooks”.
Steve Smith says
Too many applications are being marketed as stand alone solutions -at too high a price (like $100 per month) – when they really need to be added to existing core applications; like financial planning software or CRM, which cost less than that already. The spending reduction example you describe is a perfect example. Or a social security analyzer. And who needs a separate estate planning portal. I want one portal with many uses.
These narrower application developers need to partner with the popular core application providers to add and integrate these features at inrements of $20 or $30 per month.
Steve Chen says
Good article Michael. I completely agree that it’s hard to try to sell to wealth managers individually since it’s such a fragmented space. However as the costs of building solutions come down and the ability to go direct to consumers goes up – there are other paths to the market. We’re trying to take advantage of that as we build our user base for DIY Retirment Planning at https://www.newretirement.com/
Meg Bartelt says
I’ve heard your comments before about our profession’s technology solutions being behind the curve. What other professions/ industries are you thinking of that are so far ahead of us? Because I can think of a lot of industries whose technology, at least from the end consumer perspective, is appallingly bad, old, and outdated.
(And hey! The bit about the pricing problem of conference exhibitors sounded familiar. ?)
Wealthbox CRM | Starburst Labs says
Nice article, Michael. Lots of points we agree with, and we’d offer this added perspective…
You write: “This dynamic wouldn’t be so problematic if advisor tech firms had a good way to reach advisors en masse, but unfortunately, they don’t! The most logical way to try and do it is to reach advisors through conferences as an exhibitor, but even this isn’t feasible for most startups given the high cost of renting a booth at the typical advisor conference.”
For Wealthbox, the “most logical way” to reach advisors isn’t exhibitor conferences; it’s something called… get ready… drum roll please… “the web”!
Here’s an excerpt from “Fear & Loathing in Las Trade Show Circuit” – a to-be-published blog post I wrote about this topic:
“For tech vendors, exhibitor sponsorships on the advisor tech circuit feel like you’re attending a big family reunion – every other week. While it’s great to connect with tech partners and meet a few advisor customers, there’s something anachronistic about sitting in the typical 10’x10’ booth waiting for a prospective customer to walk by as if you’re selling vinyl siding at a home builders convention in 1977. In the new world of bits over atoms, it’s also vaguely weird, definitely ironic, and insanely expensive to book hotel accommodations, fly across the country, and fire up a web browser to do a demo of a digital product. What’s the point of the web again?”
Food for thought…
JR – Wealthbox