The ongoing commoditization of investment products is driving a fundamental shift in today’s financial advisor platforms, as broker-dealers and custodians transition from being primarily about financial services products, to instead trying to operate as the technology hubs around which financial advisors build their businesses.
The transition is appealing because ultimately broker-dealers and custodians are a form of platform business model, which takes a small slice of all the assets and transactions that flow across the platform. Which means in the end, the more successful the financial advisors on the platform are, the more successful the platform itself will be.
The challenge, however, is that the rising demand from financial advisors for better technology is driving a number of advisor FinTech software providers to build increasingly comprehensive solutions, aiming to compete directly with the often-proprietary platforms of today’s broker-dealers and custodians. From the growing portal platforms of Orion Advisor Services and eMoney (before it was acquired by Fidelity), to the launch of Salesforce Financial Services Cloud and Black Diamond’s acquisition of Salentica, it’s “game on” for independent FinTech providers to build comprehensive solutions for financial advisors.
Unfortunately, though, this transition has set financial advisor software companies on a collision course with broker-dealer and custodian platforms themselves, and it’s a collision that many of the independent FinTech companies cannot survive. Because the reality is that in the end, financial advisors will only pay “so much” for a software solution, and independent software proivders simply cannot compete with the size and scale of a true platform business – as companies like Garmin navigation quickly learned when Google Maps showed up, or the entire CD music business learned when iTunes showed up.
Notably, this doesn’t mean that all financial advisor technology will inevitably consolidate around broker-dealer and custodian platforms. Because those platforms really only need to “control” the technology that is integral to their platform itself. But it does mean that the most successful advisor tech companies in the future may not be the ones that are the most comprehensive – unless they can truly pivot to not just platform software, but a platform business model – and instead will be the ones that stay focused in their core competency, and are most effective at building flexible APIs to integrate most easily with other real platforms (and their often-legacy existing technology infrastructure).
Or viewed another way, the future of independent financial advisor FinTech software companies is to become the best “Apps” in the App Store of custodian and broker-dealer platforms. Not to try to become App Stores themselves… a transition that most will inevitably lose, because they cannot outcompete and replace the true platforms that advisors still need to invest their clients’ actual portfolio dollars.
How Financial Advisor Platforms Are Evolving Into Technology Platforms
When it comes to financial advisors, in the past our various technology platforms co-existed peacefully, because they ultimately served different marketplaces and fulfilled different “matching” functions.
For instance, broker-dealers matched brokers to (commission-based) securities products (to be subsequently sold to clients). RIA custodians matched advisors to an array of investment solutions they could implement for a fee with their own clients. In essence, one was a platform for securities salespeople selling financial services products, and the other was a platform for (largely discretionary) investment advisers. And the legal and regulatory differences between selling products for a commission, and managing portfolios for a fee, meant that advisors generally chose one or the other, but not both.
In the “early” days of financial advice, these broker-dealer and RIA platforms competed primarily by the quality of the marketplace they created – their tools and support to sell securities products or implement investment portfolios, and the breadth of their marketplace of products or investment choices. However, over time the focus has increasingly turned to the “platform” itself – the tools and technology used to support and implement the financial advisor’s business on that platform. Especially as the availability of the products and solutions themselves become commoditized.
In other words, early on it was about whether the platform offered a particular ETF or mutual fund or annuity or third-party manager. But now, when any financial advisor can buy virtually any mutual fund or ETF or manager from any custodian, and can implement almost any commission-based mutual fund or annuity at any broker-dealer, the platforms themselves have to come up with some other way to differentiate. Because when everyone has access to the same final information or products, it’s the effectiveness of the platform itself that dictates the “winner”. Thus, while everyone had access to the same World Wide Web pages to index and categorize, and Google was actually the 21st search engine to enter a crowded marketplace, it ultimately differentiated and was victorious by the quality of its platform solution, taking the same end information that everyone else had, but better matching it to consumers and their needs.
Accordingly, broker-dealers have increasingly been pressured to provide a full technology platform to financial advisors, and RIA custodians have become more and more like tech companies over time as well. The shift is on from product selection and investment choices, to the technology of the advisor platform itself.
The good news of this shift is that it is driving new investments into advisor FinTech solutions, amplified further by the rise of the robo-advisors, who aren’t taking market share, but did shine a bright light on the lagging tech solutions at existing financial advisor platforms today. The bad news, however, is that competition to serve the full breadth of a financial advisor’s needs, as products themselves are commoditized and all channels converge on comprehensive financial advice, is potentially spurring too many financial advisor platforms, and not all of them can and will survive!
Growing Competition To Be THE Financial Advisor Platform
For most financial advisors (at least those who in some way provide investment advice or implement investment products), the “core technology stack” is comprised of CRM, financial planning software, and a portfolio accounting solution (supported by trading/rebalancing software).
Accordingly, major financial advisor platforms have increasingly been shifting to provide comprehensive solutions that cover most or all of these components. From Envestnet buying Tamarac and more recently FinanceLogix and Fidelity acquiring eMoney Advisor, to announcements that Schwab is working on a new version of PortfolioCenter called Portfolio Connect and Fidelity is building its own portfolio accounting solution into the new Wealthscape platform, and major deals between Cetera and MoneyGuidePro and LPL and FutureAdvisor (while Commonwealth and Raymond James build their own proprietary CRM). Whether it’s an approach to buy, build, or partner, major advisor platforms are moving aggressively to round out their full suite of advisor technology.
However, the notable trend in recent years is that advisor platforms themselves are not the only ones trying to build comprehensive advisor technology solutions. Advisor FinTech companies themselves are beginning to acquire and build across a wider range of solutions, morphing towards a more comprehensive platform.
Thus, for instance, Salesforce has announced its Financial Services Cloud, eMoney was building its eMx portal to be the advisor’s daily dashboard (a strategy that Fidelity’s acquisition seems to simply double down on), Orion open-sourced a big slice of its code to become a more central platform hub, Morningstar bought TRX rebalancing software, and most recently Black Diamond’s portfolio accounting solution bought Salentica CRM.
The relatively straightforward strategy seems to be the idea that if advisors already use a piece of technology, and want everything to be integrated and interconnected, the opportunity for any software company is to expand its offering to those other integrated components. By acquiring or integrating more components of the stack, the software company can “expand wallet share” and make it harder for any advisor to leave, improving its appeal for those advisors seeking fully integrated solutions, and tying them into an (independent FinTech) ecosystem that improves long-term retention for the software company.
However, the challenge of this shift is that while in the past, advisor technology companies were partners to existing financial advisor platforms – solutions that the advisor (or platform) could plug into its existing ecosystem – as advisor software solutions expand to become their own platforms, they are increasingly on a collision course with RIA custodians and broker-dealers trying to accomplish the same thing. In other words, companies like Orion, Black Diamond, or even Morningstar used to simply partner with and integrate with RIA custodians and broker-dealers… but now, they’re increasingly finding themselves in head-to-head competition to control the core of the advisor’s tech stack.
Why Most Independent Software Companies Will Fail As Financial Advisor Platforms
This collision course is significant, because I believe that ultimately most financial advisor FinTech companies will fail in their efforts to become holistic financial advisor platforms.
The reason is that while their software may be important, and ultimately all of those software tools together may constitute a “platform” on which the advisor operates, the software company itself is not actually a true platform business model.
The key distinction is that in order to be a true platform business model, the participants on the platform must come together for an exchange… where the platform itself can financially benefit from or monetize some portion of the exchange. For instance, eBay brings together buyers and sellers, and takes a slice of each transaction. Amazon brings together consumers and merchants, and takes a slice of each transaction. Google brings together people searching for information and advertisers who want to reach them, and takes a slice of each transaction (through getting paid for advertising).
But even a holistic and standalone financial advisor technology stack is not actually part of a value exchange transaction between the advisor and another party. In the end, it’s a back-office solution for the advisor’s own (pipeline) business. In other words, the advisor buys the software to use to deliver his/her own services, but the software company’s “platform” isn’t actually part of the client transaction. It only powers the advisor’s own business behind the scenes. And must be paid for directly out of the advisor’s overhead expenses.
By contrast, consider the broker-dealer platform model. Advisors who use the technology of a broker-dealer to become more successful don’t just pay the broker-dealer for the technology. Instead, the broker-dealer’s technology ultimately facilitates the advisor doing more business with the financial services product manufacturers, who distribute products through that broker-dealer (and ultimately to the end client). And the broker-dealer takes a slice (through the grid). Which means the broker-dealer doesn’t actually need to make money on its software solutions; it just needs them to make the advisor’s own business more successful, and benefit from the increased volume of platform transactions.
Similarly, the RIA custodian platform model provides technology, but it’s to facilitate financial advisors who are deploying client assets in the investment marketplace. And whether it’s putting money into a money market fund, or paying the ticket charge on a stock trade, the RIA custodian gets a slice of every transaction. Which, again, means that RIA custodians don’t actually need to profit from the software to monetize the software. Thus why TD Ameritrade purchased iRebal, and ultimately turned its $50,000/year licensing fee into a free solution for any/all advisors on its platform.
In other words, the software company gets paid for the software; the true platform business model provides the technology to help the participant in the marketplace engage in more transactions, and earns its profits from the increased activity that occurs as a result. Without any need to be paid directly (either as much, or at all) by the advisor themselves.
And in the aggregate, the distinction is significant. Because software companies are ultimately limited by the amount of money they can charge any particular advisor, based on the advisor’s business needs, ability to afford the solution, and the available alternatives for the advisor to solve his/her business problems elsewhere. It’s a brutal competition to get a slice of the advisory firm’s overhead expense allocation. By contrast, true platform marketplaces have the opportunity to profit based on the volume of transactions and ‘value exchanges’ that pass through the marketplace, a more indirect but potentially much larger profit opportunity. Especially because the revenue often comes directly from the value exchange transaction itself, which means it’s borne jointly by the advisor and their client (e.g., a ticket charge, or the scrape of a 12b-1 fee), rather than forcing the advisor to write a check.
For instance, Schwab’s technology ultimately facilitates over 7,000,000 revenue-producing trades in a year (from commissionable trades to bonds with markups, OneSource funds, fee-based wrap accounts, and more), for which it generated a whopping $825 million of trading revenue in 2016. In fact, Schwab’s platform is so large, with over $2.5 trillion of retail and institutional assets, that if interest rates just rise enough for Schwab to earn a profit on its money market funds, it’s estimated the company can earn $650 million in additional revenue.
Consider that for a moment. Schwab can generate $650M of revenue based on just earning a few basis points on a few percent of the trillions of client assets attracted to its marketplace, through its technology that advisors use… even without charging a dime for the technology itself.
That, ultimately, is why it’s virtually impossible for pipeline companies (solutions that fit into the advisor’s delivery pipeline) to compete with true marketplaces. Because the marketplace can scale drastically beyond what pipeline competitors can, which in turn makes it possible to generate revenue that is an order of magnitude larger, even if the technology itself couldn’t be sold to an advisor for a fraction of that price.
This is why Uber is bigger than any individual taxi company, AirBnB is bigger than any hotel chain, and Amazon may ultimately be dragging down the entire retail industry. Similarly, Google largely obliterated the GPS navigation industry, simply because it was so profitable to be a successful search engine and mapping tool (because it supported Google’s advertising business), that they could afford to give away the technology for free and put their competitors out of business with a better platform business model.
Ultimately, I fear that this may be the demise of many of today’s CRM, financial planning, and portfolio accounting software solutions that are trying to evolve into holistic platforms. As single standalone solutions, they could “plug in” to an existing platform, solving a particular problem better and more efficiently than the platform could itself. Not every platform wants to have to buy or build every component of the solution; just the ones that are central to their platform value proposition. But the more independent FinTech software for advisors expands, the less that can fit into an existing broker-dealer or RIA custodian platform, and the more the software provider competes with the platform directly. Yet independent software companies for advisors are not true platforms, because in the end they’re simply solving the back-office challenges of an advisor’s pipeline business model, rather than actually facilitating (and getting paid to facilitate) a true marketplace exchange.
The distinction matters, because eventually, true platform companies that can ‘cross subsidize’ the technology with the actual profitability of the marketplace will be more successful, precisely because they don’t have to just rely on the economics of advisors buying the software alone. In fact, this helps to explain exactly why Schwab is building its next generation portfolio accounting, why Fidelity is building its own next generation portfolio accounting, and why Envestnet is expanding its tech platform (as even though it’s a heavily tech-centric company, it’s important to note that the company’s core is still facilitating a platform marketplace between advisors and third party asset managers who want to work with them!). Expect to see Schwab buy or build its own financial planning software soon as well. And as Morningstar tries to pivot from a data company to a platform business, with the growth of its Managed Portfolios and newly announced Model Marketplace, expect to see them continue rounding out their holistic advisor technology stack as well (presaged by their acquisition of tRx last year).
In other words, if you were a financial advisor platform that actually did facilitate a marketplace and could ‘infinitely’ scale profitability simply by attracting more advisors and clients to the platform, why wouldn’t you “give away” quality software at a below-market (or potentially, entirely free) price point, since the successful growth of the platform marketplace can ultimately be far more profitable than the software alone anyway?
Succeeding As Financial Advisor FinTech – Be The Best App In The (Custodian or Broker-Dealer) App Store
Notably, these dynamics do not mean that all financial advisor tech companies are dead or doomed. Because some marketplaces may choose to work with outside providers, rather than building everything themselves. In fact, the whole point of a platform is that it becomes a nexus point for multiple producers and consumers/users to come together for solutions.
Perhaps the best case-in-point example is TD Ameritrade, which has differentiated itself amongst the custodians by making one of its advisor benefits an advisor tech platform marketplace of its own – Veo, which facilitates a marketplace between advisors and other FinTech solutions. Similarly, Pershing Advisor Solutions has previously announced its own open API and integration strategy to become a marketplace for advisor technology. And even somewhat more “captive” proprietary platforms like Schwab still facilitate open access (e.g., via Schwab OpenView Gateway) to parts of the technology stack they don’t actually want to build themselves. Because the reality is that even for a financial advisor platform, it’s not necessarily (nor even desirable) to try to build all of the technology solutions for advisors; it’s just necessary to build the technology that is integral to the platform itself, and the ability of advisors to conduct business there.
In other words, there’s a difference between building an App store, and trying to produce all the Apps in the store. While companies like Apple and Google do populate certain key apps in their own stores (e.g. iMessage and iTunes, Gmail and Google Docs), in the end the overwhelming majority of the marketplace is comprised of other, third-party technology solutions (i.e., app makers) who produce apps that consumers can purchase and use. And RIA custodians and broker-dealers can and do operate similarly.
In this context, the key for most financial advisor FinTech solutions to survive and thrive in the future is to focus on what they do best, and be the “top App in the [custodian or B/D] App store” in their category, the best-in-class solution for whatever it is they do. Don’t try to grow the app to the point of replacing the app store, because an app – even an amazing one – will eventually be trounced by a true platform business model that will inevitably out-develop it (i.e., no advisor software company can iterate new best-in-class solutions in every category at once), or be out-competed by a superior business model (because platform marketplaces that take a slice of every transaction will always be superior to software businesses that simply require users to buy licenses). In other words, unless the company has a business model that goes beyond just charging advisors a price for their software – and can convert to a true marketplace platform themselves – don’t try to outcompete real platforms in their own core competencies, as if the platform can monetize the solution better than the software company, the platform will inevitably win (a lesson that Garmin navigation learned the hard way as Google Maps came to dominate the marketplace).
In turn, this means the software strategy is not to true to compete against true platforms for wallet share, but to become so best-in-class that any and every platform would rather use your solution than ever consider building their own inevitably-inferior one (or perhaps, even, buy your company entirely, as has happened in recent years to eMoney, Finance Logix, tRx, TradeWarrior, and more). Integrations should focus not on the depth of integrations with a select other independent software partners, but the flexibility of the API for true platforms to integrate as deeply as they can. Because as Apps from Candy Crush and Angry Birds, to WhatsApp and Skype and more have shown, it’s possible to have an incredibly financially successful software company built entirely on someone else’s platform. Those software solutions never would have achieved a fraction of their scale by trying to market and distribute directly to consumers as independent software solutions outside the App Store.
Yet again, as recent industry FinTech trends have shown, an increasing number of software companies are trying to expand outside of their core competencies, in an effort to create a more holistic solution, and pitting themselves increasingly head-to-head against true financial advisor platforms (custodians and broker-dealers). But they’re expanding the scope of their technology, without pivoting the underlying business model, a dangerous shift when the “real” platforms have an arguably superior business model and an unwillingness to cede so much territory.
In fact, one of the most common complaints I hear today in the world of so many broker-dealer and other advisor platforms is that today’s independent FinTech solutions do “too much” beyond their scope, and haven’t worked hard enough at being flexible to integrate into existing platform technology – leading more and more, from Schwab and Fidelity to Commonwealth and Raymond James – to buy or build their own proprietary solutions instead. A trend I expect to continue and even accelerate, leaving fewer and fewer independent FinTech solutions available outside of existing platforms. And once a platform buys or builds its own solution, the advisors on that platform are usually permanently lost as potential customers for other independent software company (at least until/unless the advisor leaves the platform themselves), which means the pool of available advisors for independent solutions will get smaller and smaller.
For instance, in the independent RIA space, soon the only major truly “open” platform left may be TD Ameritrade (as Schwab builds Portfolio Connect and Fidelity builds out Wealthscape), yet even TDA has acquired key components (e.g., iRebal) for its platform, and at the point that there’s only one major platform hub for independent RIA FinTech to plug in to, they’re not really independent anymore anyway, they’re simply indirect captives of their only active integration partner, TD Ameritrade!
Which means if independent financial advisor software solutions continue to expand their scope instead of figuring out how to become more flexible to integrate more easily to existing platforms – and lose more and more access as the real platforms buy or build their own truly holistic solutions – they risk being the most comprehensive financial advisor software solutions with too few platforms willing to work with them to actually survive!
So what do you think? Should financial advisor software solutions try to operate more like Apps in the RIA custodian and broker-dealer “App Store” platforms? Independent advisors often prefer independent solutions, but if you were running a custodian or broker-dealer, would you be willing to cede that territory? Please share your thoughts in the comments below!