Executive Summary
In the span of barely 10 years, companies like Uber, Airbnb, Facebook, and Alibaba have experienced explosive growth, far surpassing the growth rate of their respective industries, and despite the fact they don’t actually produce anything themselves.
Yet in fact, that’s the whole point; they are platform businesses, and their role in facilitating a marketplace between consumers and producers is the primary form of value creation, not the production of goods and services themselves. In the process, these platform businesses have been out-competing or outright disrupting their respective industries, raising the question of whether – or when – the platform model will come to financial services as well.
In point of fact, though, the financial services industry is already filled with platform businesses. Arguably, stock market exchanges are one of the oldest and original types of platforms to connect buyers and sellers. And custodians and broker-dealers constitute a form of platform business as well, connecting advisors and the asset managers who want to reach them. Envestnet is quite possibly an even purer form of platform business, avoiding the hassles of actually being the custodian or doing the clearing, and instead just serving as technology that facilitates the matchmaking process between advisors and asset managers.
Still, this means the door remains open for an actual financial advisor matchmaking platform, that connects consumers directly to financial advisors themselves. Prior attempts at this model have largely failed, likely due to the fact that most advisors are such generalists that it’s not really feasible to match them effectively with consumers in the first place. In turn, this suggests that a successful platform in the future will need to focus not on pairing consumers with advisors, but on helping consumers find an advisor who can answer their particular question – which forces advisors to actually choose a niche specialization by which they can be matched. Which means in the end, the real platform opportunity of the future is not a financial advisor platform, but a financial advice platform instead!
The Rise Of The Platform Business Model
For most of history, the traditional business model has been some form of pipeline business – one where the consumer buys a product or service that is delivered by the business in a series of linear steps from one end of the pipeline to the other. With a relatively simple product or service, the consumer may buy directly from the original producer. In more complex businesses, the pipeline may be elongated, with one company designing the product, the next manufacturing it, and another distributing it for sale, and each business adds some value (and earns its keep) along the chain.
In the past decade, though, we’ve witnessed the emergence of an entirely new model: the platform business. The key distinction is that while pipeline business models are limited to how quickly producers can create a good or service and push it through the pipeline, the platform business uses technology to connect consumers and producers directly (and take a small slice of the transaction). The key distinction: by “merely” being the connector of other buyers and sellers, without being in the business of buying and selling directly, platform businesses can grow and scale far more rapidly than was otherwise possible with any business model of the past.
Thus, in the span of barely 10 years, some of the world’s largest companies have grown “out of nowhere”, dominating industries with companies that have been around for decades, despite the fact that the upstarts do not actually produce any goods or services. As Tom Goodwin recently noted: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.” The key driver that makes the platforms so extraordinary: “network effects”, or the phenomenon that the more people use the platform, the more desirable of a marketplace it is for other people to use.
Which raises the question: what industries will be impacted next? And is it only a matter of time before the platform business model consumes the financial services industry, too?
Financial Services: The Original Platform Businesses?
Notably, from the perspective of bringing together buyers and sellers in a central marketplace, arguably the financial services industry is the original platform business. After all, matching buyers and sellers is exactly what the stock market – or more specifically, the stock exchanges – were established to do. In this context, arguably most of the financial services industry itself is simply a collection of the ancillary businesses that support the stock exchange platform business. Apple and Facebook have “app” makers; the stock market has investment banks and broker-dealers.
Notwithstanding the fact that the stock market itself is one of the oldest and largest platform businesses, though, there are other platform businesses within the industry that help to facilitate interactions (i.e., transactions) between producers and consumers as well.
For instance, custodians and independent broker-dealers serve as a form of platform, facilitating interactions between advisors and their suite of available products; notably, while consumers are the ultimate end-buyers of those financial services products, in this context the custodian or broker-dealer platform is the intermediary between the advisor and the product manufacturer themselves. Thus, just as Upwork connects businesses to freelancers, and provides a platform to help facilitate those transactions and the associated workflows, so too do custodians and broker-dealers offer a suite of technology tools (e.g., trading and rebalancing and portfolio accounting software) to help facilitate the transactions that advisors engage in via their platforms.
Perhaps an even better example of a platform business serving financial advisors would be Envestnet, which similar to broker-dealers and custodians facilitates financial advisors connecting with asset managers for various types of investment solutions. What’s notable about Envestnet from the platform perspective, though, is that they don’t actually serve as a broker-dealer or custodian at all; in fact, they work with those companies as a technology layer on top, using their technology to facilitate connections between advisors and third-party investment managers. The end result: Envestnet has $880 billion of platform assets, of which it only actually manages barely 11%; the remaining 89% are all under “advisement” and licensing fees for being the platform that connects advisors to other investment management solutions. And Envestnet’s ongoing technology acquisitions, from Tamarac to FinanceLogix and then Yodlee, have all helped to make it into an ever-larger platform, with a growing suite of technology tools to help facilitate more platform interactions.
Notably, though, it’s not the mere presence of technology that establishes a “platform”, but its ability to perform a matchmaking process. Pure financial advisor technology platforms, from financial planning software platforms like eMoney Advisor to CRM-based platforms like Salesforce Financial Services Cloud or the new FinLife Partners to portfolio-accounting and investment based platforms like Orion Advisor Services or Morningstar’s Advisor Workstation, may help make financial advisors more productive, but their ability to add value is contingent on the effectiveness of the advisor’s pipeline business in the first place. They cannot naturally scale the way pure platforms can, as technology to augment advisors is still ultimately constrained by the ability of the advisors to grow their own businesses.
Will There Ever Be A Financial Advice Platform In The Future?
While custodians, broker-dealers, and especially companies like Envestnet function as a form of platform business between financial advisors themselves and the financial services product manufacturers trying to reach them (and their clients), they are not actually platforms that facilitate consumers finding a financial advisor, where “advice” itself is the value interaction. But could there ever be an actual “financial advice” platform business that matches advisors and consumers, akin to how Uber matches drivers and riders?
In point of fact, some have tried in the past to build such a platform. The closest representation of the model was MyFinancialAdvice, an initiative that begin in the early 2000s but ultimately shut down a few years ago after failing to get sufficient traction with consumers. Another example still in practice is Paladin Registry, which also provides a “matchmaking” service between consumers and financial advisors (which the platform helps to vet on the consumer’s behalf). And several membership associations and advisor networks provide their own form of “mini”-platform for consumers to find an advisor, including the NAPFA “Find An Advisor” tool, the CFP Board’s “Find a CFP Professional” site, and the find-an-advisor capabilities of the Garrett Planning Network and our own XY Planning Network.
Some might suggest that the various “robo-advisor” solutions are also functioning as platforms, but in reality their managed-accounts solution is far closer to a traditional pipeline business than a platform model. Companies like Betterment and Wealthfront (and while it was still independently owned, FutureAdvisor) ultimately construct their own portfolios, and what they sell to consumers is their (automated investment) portfolio construction services, produced by the robo-advisor and directly delivered by the robo-advisor. In turn, this means that robo-advisors must ultimately still market to consumers like any/every other pipeline business trying to distribute its products or services to the public, and there are no prospective network effects; while a larger customer base can mean some economies of scale, and potential referrals, the robo-advisor “platform” value interaction itself does not become more valuable with more users (unlike a service like Uber, where more riders means more demand for drivers, and more drivers means faster response times for riders, a network effect virtuous circle).
On the other hand, there are a few technology firms that have at least tried to initiate a bona fide form of platform business for at least some aspects of investment management services. Motif is arguably a form of platform business after it pivoted early on from designing its own motifs to allowing others to create them – which means the platform now connects Motif designers to investors who want to buy those motifs, in a relationship that can at least potentially exhibit network effect benefits (as more investors create demand for more motifs, and more motif demand creates more income potential for motif creators, in a virtuous circle). Similarly, Wealthfront’s predecessor business model KaChing also operated as a platform that connected consumers to others who managed investments so they could mirror the trades themselves (a rough version of Envestnet but for investment managers going directly to consumers, rather than to advisors), though the company ultimately pivoted away after failing to attract substantial assets to the platform.
Again, though, even these robo-advisor solutions ultimately are (or at least were) still trying to build platforms to connect consumers with investment managers where the value interaction was portfolio management and investment selection, not more holistic financial advice, and certainly not a matchmaking service to connect to advisors themselves.
Why Aren’t Financial Advice Platforms Working Now?
Given the potential for a matchmaking platform to connect consumers with financial advisors, the question arises as to why such a platform hasn’t taken off already.
Prior advisor matchmaking platforms have seemed to fail because they couldn’t get consumer traction, in a world where client acquisition costs are already a significant inhibitor to expanding the reach of financial advice. Notably, this also implies that there was a failure for any network effects to help the platform gain traction, which can either enhance the value interactions on the platform (giving the platform more revenue to market) and/or bring down the acquisition costs (as the increasing value and usability of the platform spreads by word of mouth).
In practice, though, an added difficulty for most financial advisor matchmaking platforms today is that it’s hard to match a consumer to an undifferentiated, generalist advisor in the first place. The lack of any kind of niche or specialization for most advisors means there’s no useful criterion to match the advisor to the consumer. And the relatively small number of clients per advisor, even for an established advisor, means it’s virtually impossible to reach a critical mass of advisor ratings/reviews. The end result – most advisor matchmaking sites end out matching consumers to advisors based on location, even though an advisor’s zip code has no practical relationship to whether the advisor can effectively solve the consumer’s financial problem.
At best, the few matchmaking sites that tend to do the best now are the ones that have some kind of differentiating criterion that makes the advisor eligible to be on the platform in the first place – as NAPFA only matches consumers to “fee-only” advisors, the CFP Boar only matches to CFP Professionals, the Garrett Planning Network provides matches for the middle class looking for hourly advice, and XY Planning Network helps Gen X and Gen Y consumers find an advisor who works for a monthly fee with no asset minimums.
Arguably, though, perhaps the biggest failure of prior financial advisor platform attempts was that they tried to match consumers to a financial advisor, instead of matching consumers to the financial advice that answers their questions. Because the reality is that most consumers don’t wake up in the middle of the night saying “I need a comprehensive financial plan” or “I’ve got to find a financial planner”; instead, they wake up sweating a particular financial question, from “will I be able to afford to send my kid(s) to college?” or “am I making the right decision about starting Social Security now?” or “should I refinance my student loan debt?”
In this context, the key value interaction on a financial advice platform would not be helping consumers to find an advisor, per se, but helping them to find an advisor who can answer their pressing financial question. This also helps to explain why “financial advisor review” sites have also failed to gain traction; because consumers aren’t looking for advisors (and their ratings and their geographic location and their undifferentiated "we specialize in everything"), they’re looking for answers to financial questions (that might be provided by a particular advisor). In turn, this implies that what the financial advice platform must do well is match consumers with a particular question to the specific financial advisor who has the specialized expertise to answer that question.
Dear fellow financial advisors: this is why we can't have nice things. #CantSpecializeInEverything #NotCredible pic.twitter.com/4NdZdScwMu
— MichaelKitces (@MichaelKitces) May 7, 2016
Notably, this is exactly how most other advice platforms operate when it comes to other professional services as well. While financial advisors almost always start by offering “comprehensive financial planning/advice” even if that makes it harder for consumers to tell us apart, sites like RocketLawyer offer an “Ask A Lawyer” service (not a “Find A Lawyer” solution), and ZocDoc does pair consumers up directly to a doctor, but the first question is “what doctor specialty” is the consumer seeking? Matchmaking goes to solving the question/problem first, and introduces the professional service-provider later.
How Would A Financial Advisor Platform Business Work?
These dynamics of consumers searching for advice, not advisors, suggests that the true “financial advice platform” business of the future will most likely be a matchmaking platform between consumers and financial advisors with various specialties – i.e., niches – that make it easy to identify which advisor is the right match for the consumer’s question. The key criterion for success will be bringing together a critical mass of advisors who all have specialties individually but in the aggregate have enough breadth to answer a wide range of consumer questions. In turn, the breadth of answers can attract consumers to the platform to get their questions answered, and the greater demand for advice draws more advisor specialists to the platform, and gives them more opportunities to deliver that advice, in a virtuous circle.
Notably, in a world where the biggest challenge for advisors to specialize is finding enough clients to fill their potential “billable hours”, a growing level of consumer demand for advisor specialists – facilitated by the platform itself – would make it easier for advisors to specialize, and even make it feasible for them to charge lower rates. After all, while hourly financial planners commonly charge as much as $150 - $200/hour, an advisor specialist who was “assured” of getting 1,000+ billable hours could make $100,000 charging “just” half that hourly rate (and still have the other half of their year available to build the rest of their business). And such demand for advisor niches could itself help to persuade more advisors to adopt a niche!
Fortunately, though, to the extent that the financial advice platform encourages and drives advisors towards niches, the advisors will be easier to match in the first place, solving the fundamental problem that exists today: advisors aren’t differentiated enough to be matched based on anything but their geographic location, driving up the cost of client acquisition and the cost of financial advice in the first place. Which means in the long run, solving the matchmaking problem between consumers and financial advisors can not only make it easier for consumers to get their questions answered, but make it less expensive, too.
So what do you think? Do you think a financial advisor - or financial advice - matchmaking platform would be viable? Would you participate on such a platform, if you had to actually pick a specialization to focus on? Would matching consumers based on their financial questions be more effective than trying to match advisors based on geographic location?
