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.