Executive Summary
For the past several decades, platforms for advisors have differentiated with the quality of their technology. The focus on ‘tech’ was a natural evolution for advisor platforms away from their roots – which was originally to differentiate by the quality of their proprietary product shelf, the primary means that brokerage firms and insurance companies attracted advisors to them in the 1960s, 70s, and 80s. As product shelves became increasingly open architecture in the 1990s and 2000s, what mattered wasn’t the particular products made available to advisors (because the answer increasingly was “anything you’d want is already there”), but the technology that the advisor platform made available to implement those products and help the advisor better run their business.
However, the reality is that it’s very expensive to build and maintain technology, especially when considering the full range of CRM, portfolio management, financial planning, and more than a dozen other sub-categories of technology that financial advisors use in their firms. Consequently, the technology that most of today’s advisor platforms (e.g., broker-dealers, RIA aggregators, TAMPs, etc.) are touting is not actually their own proprietary technology… it’s a selection of third-party technology tools they’ve woven together to become the ‘tech stack’ they offer to their advisors. Which is usually one from a list of just 3 leading providers in any particular category. Such that, in the end, advisor platforms are increasingly all offering the exact same technology tools… and signaling an end to differentiating advisor platforms with technology altogether!
So what’s the alternative for advisor platforms to differentiate in the future? In a word: Services. Because advisory firms still – and will always – continue to need team members to provide service and handle the tasks that go beyond what technology alone can automate.
In practice, support services from advisor platforms might include a wide range of consulting services – from compliance to an advanced planning team, operations to technology – that advisors could engage for a fee as needed. Though arguably the even bigger opportunity is for advisor platforms that provide ongoing staff support services in the key areas where advisory firms need ongoing support – from (virtual) assistants for administrative tasks to ongoing compliance support, bookkeeping, and financial reporting to paraplanning, trading and investment research, and more. Staffing needs that already consume 15% or more of the typical advisory firm’s revenue today… as compared to the barely 4% of revenue that the typical advisory firm spends on technology. Which means that providing services is actually far more of an economic opportunity to serve advisors than it is to ‘just’ solve their technology needs!
In the long run, the growth of advisor platforms as service providers – not ‘tech’ platforms – will also create more opportunities for differentiation, as some will inevitably be better at delivering services than others and/or will be better at the needed services for particular types of advisors with whom they can specialize. Which also gives the most successful service-providing advisor platforms more pricing power in what has become an increasingly commoditized payout-centric competitive environment. As well as the opportunity to drive greater margins for themselves by reinvesting into technology – not for their advisors, per se, but for themselves – to better deliver their services to advisors as ‘tech-enabled service providers’.
The key point, though, is simply to recognize that advisor platforms are not large enough to build all of their own technology from scratch, and cannot sustainably differentiate themselves by offering the same suite of technology solutions that more and more other advisor platforms are offering as well. The opportunity comes in the gaps between technology – the service work that humans must still accomplish – that drive most of the costs of advisory firms as service businesses in the first place. Which means the most successful advisor platforms in the future will be those that best deliver services that allow advisors to run the human parts of their businesses more efficiently!
The History of Advisor Platforms As Technology Platforms
The modern origin of “financial advisors” were people who were actually in the business of selling insurance or investment products – the reigning financial services products of the post-World-War-2 era – and, in that context, who would be engaged as a financial services professional by a consumer to understand their (insurance or investment) needs, identify their (insurance or investment) gaps, and sell them the (insurance policy or investment) products to plug those gaps. Which meant, in practice, that financial advisors were affiliated with either an insurance company as an insurance agent or with a broker-dealer as their registered representative (i.e., “stockbroker”).
Notably, in its original product-sales model, the financial advisor was ‘affiliated’ with the insurance company or broker-dealer, because the client actually engaged with the company to buy their insurance or investment products, for which the advisor was literally just an “agent” or “representative” of the company. Which meant the advisor relied on the company to provide ‘everything’ to operate as an advisor because the advisor was really operating within their company in the first place. At the time, there was no independent advisor business as we know it today; the whole structure was predicated on every advisor being an employee of the company and representing their company and its line of products to their clients.
The ‘bad’ news of this arrangement was that advisors were typically captive to their company and its (and only its) line of (typically proprietary) insurance or investment products. The ‘good’ news, though, was that the investment and insurance companies that did this well could become very large, often with many thousands of advisors. All of whom delivered the same products to their clients. Which was very conducive to building standardized systems and processes, and eventually technology to make it more efficient.
And because technology, in particular, was so impactful on the efficiency of an advisory firm, when computers first showed up in the workplace in the 1980s and expanded in the 1990s, the largest advisor platforms began to build their own technology solutions for their specific cohort of advisors, leveraging the sheer size of their thousands of advisors across whom they could amortize the software development costs. The end result was that the largest advisor platforms with the broadest base of advisors to develop for (and therefore that could invest the most into software development) had the best technology.
In turn, as large advisor platforms hungered for even more advisors and more volume of products to be bought on/through/via their platform – to further scale the resources they could reinvest into their technology – the platforms themselves were becoming increasingly ‘open architecture’ to be able to accommodate more advisors and facilitate more products. These developments in technology eventually made it possible for almost any advisor on any platform to buy almost any product that was available via that platform.
Consequently, insurance brokerages began to emerge, and, more substantively, the mutual fund (and later, ETF) world began to evolve away from direct distribution (where advisors would use the technology of, and open accounts directly with, each individual mutual fund provider) and into open-architecture brokerage platforms (and later, platform TAMPs like Envestnet) that could access ‘any’ fund or asset manager.
Similarly, the core brokerage platforms that had built the largest custody and clearing back-end technology platforms began to ‘lease’ their technology out to smaller brokerage firms as well, spawning the rise of “independent broker-dealers” that used ‘newfangled’ technology platforms with open-architecture product access to allow their representatives to implement any product through that technology platform. Facilitating an explosion of ‘small-to-mid-sized’ independent broker-dealers with ‘just’ dozens or hundreds of advisors that could compete with the largest (and previously most tech-enabled) advisor platforms by attaching themselves to even-larger platforms like Pershing and Fidelity’s National Financial Services (now Fidelity Custody and Clearing).
The ultimate conclusion of this evolution is that while in the early decades (the 1960s, 1970s, and into the 1980s) of financial advisors, most picked their advisor platforms (insurance companies and broker-dealers) largely on the basis of which companies had the best array of (proprietary) products available; in the 1990s (and into the 2000s and 2010s), though, advisors began to choose their platforms based on the technology itself that was provided to be able to execute their businesses more effectively. Both because the technology actually commoditized access to products (by making open-architecture platforms that could access virtually any product such that ‘proprietary’ products became increasingly rare), and also because the quality of the technology itself became a differentiator (as ‘product shelf’ ceased to be one).
And the trend still continues today, with a recent Cerulli study still showing that “technology” is the most commonly identified factor (56%) that influences an advisor’s choice of which (broker-dealer) platform to affiliate with!
Why The Future Of Advisor Platforms Is Services, Not (Commoditized) Tech
While recent Cerulli data show that advisors look heavily to an advisor platform’s technology when deciding what platform to (join or) switch to, the reality is that very few broker-dealers (or, in today’s environment, mega-RIAs) actually have ‘unique’ technology to access by joining that particular advisor platform. As in practice, it’s still very expensive for firms to actually build their own truly proprietary custom-built technology.
Consequently, over the past 20 years, there has been an ongoing consolidation of custody and clearing firms, such that today the overwhelming majority of RIAs and broker-dealers all use the same small handful of back-end platforms (Schwab, Fidelity, and Pershing) to power their businesses, and only a few self-clearing independent broker-dealers even remain (e.g., LPL, Raymond James, and Ameriprise).
Similarly, most of today’s independent advisor platforms simply buy third-party technology to overlay on these third-party brokerage/RIA systems in the core domains that advisors need, such as portfolio management, CRM, and financial planning. And those platforms have also increasingly concentrated, too, with the bulk (50%–70%) of the market share held by just 3 players in each category, from Orion, Tamarac, and Black Diamond in portfolio management; to Salesforce, Redtail, and Wealthbox in CRM; and eMoney, MoneyGuide, and RightCapital in financial planning software.
Which means that while today, advisor platforms may differentiate from ‘legacy’ players still running outdated technology by offering the more ‘modern’ technology tools available… most broker-dealer and RIA platforms use 1 of 3 custody/clearing platforms, while offering 1 of 3 portfolio management tools, 1 of 3 CRM systems, and 1 of 3 financial planning software solutions. Or stated more simply, technology is actually becoming less and less of a differentiator amongst advisor platforms that are increasingly all using the same few leading providers, and the only way platforms can differentiate is which are the largest and drive the hardest bargain to get that same software for the cheapest… otherwise known as selling a commodity!
So what’s the alternative for advisor platforms to differentiate in the future? In a word: Services.
Consulting Services That Advisor Platforms May Provide In The Future
In practice, most advisor platforms today are already built heavily around at least one support service in particular: compliance. In the context of broker-dealers and insurance companies, there is typically a depth of compliance support simply because it’s legally required as advisors are technically agents or registered representatives of the company, and the company has a legal obligation to oversee them and ensure they are in compliance.
However, compliance is a domain that requires very specialized knowledge – of particular rules and regulations that apply to financial advisors and their firms – and while all financial advisors do (or at least should) know how to comply, they don’t necessarily know how to do compliance as a firm. Consequently, even within the RIA channel, it’s extremely common not only to hire compliance consultants to provide expertise and help with the compliance process, but a number of RIA-based advisor platforms have emerged that allow advisors to be IARs under a corporate RIA so that they won’t have to be responsible for their own compliance and instead can utilize the platform’s ‘compliance services’ (in exchange for a small percentage of their revenue) to take advantage of the compliance expertise they need.
And this ‘expert-consultant’ model is viable as a service offering from an advisor platform in a lot of areas beyond just compliance. For instance, it might also include access to an expert investment team of CFAs, not just to build centralized model portfolios but to be available to research and deal with unique client investment holdings that need further analysis. Similarly, advisor platforms can make available an advanced planning department that can help delve deeper into complex client issues (which, as the latest Kitces Research on Advisor Productivity shows, is associated with greater advisor productivity by helping advisors attract and retain more affluent clientele through tapping that expert team as needed for their ‘big’ client opportunities!) Ironically, consulting services from an advisor platform could even include technology consulting about which tech to use and how to use it (rather than just using the tech that the platform provides)! Not to mention opportunities for Operations and Process consulting more generally as advisory firms try to better leverage the (technology and other) systems they have.
Notably, though, these aren’t meant to be domains where advisor platforms offer/include such consulting services as ‘value-adds’. In the future, these are increasingly likely to be paid services because there’s actually a material amount of ‘revenue’ opportunity for the advisor platform that provides a good solution (good enough that they can and should be able to charge for it!)! After all, these are domains where advisors often already spend money on consultants (operations or tech), or struggle to grow large enough to hire the depth of expertise in-house (advanced investment research and advanced financial planning) because of the cost. So advisor platforms that can use their size and scale to offer those consultants at a ‘reasonable’ cost (by offering them a sizable existing base of advisors who can keep them engaged on an ongoing basis) have an outright growth opportunity!
The Opportunity For Ongoing ‘Outsourced’ Services From Advisor Platforms
While consulting services are something that many advisory firms already pay for from time to time – which creates an opportunity for advisor platforms to deliver it to them – it can be difficult to scale consulting services across even a sizable base of advisors. After all, the reality is that when it comes to consulting, individual advisors may only need a few hours at a time. Consulting is traditionally very transactional. Which means an advisor platform would need a lot of advisors to do it in order to ‘average out’ sustainably.
For instance, if an operations consultant averages a 15-hour engagement with each advisor to go through their systems and processes and provide recommendations and changes, then an advisor platform may need 100+ advisors to go through the process each year to keep the consultant ‘reasonably’ busy in their available working hours (to get them 1,500 consulting hours, actively engaged for ~75% of the available working hours in a year). In turn, if 10% of the platform’s advisors engage that consultant to overhaul their systems in any particular year (given that some advisors don’t need help because they’ve already built good systems, others are good at doing it themselves and don’t need help, etc.), then the platform needs 1,000+ advisors just to keep one good consultant busy!
And then the platform has to be cautious not to make the consultant too busy – as a consultant can only handle so many engagements at a time, and if the consultant ends up with a long waiting list because the consultant is so good and popular… then the advisors will complain that their platform isn’t providing them the consulting help when they need it because they’re stuck on a waiting list!
Fortunately, though, not all services are of a transactional (consulting) nature. In fact, advisors incur a substantial amount of ongoing cost to staff the ongoing ‘overhead’ functions of the business, from operations and administrative support to trading (for investments) and paraplanning (for financial planning), in addition to other ‘core’ business functions like IT, finances, and marketing.
In fact, the latest 2021 Investment News Pricing & Profitability benchmarking study shows that advisors spend an average of 9.4% of revenue on administrative and support staff compensation (almost 11% of revenue when payroll taxes and benefits are included). In addition to spending another 1%–2% for (often ongoing) professional services, including accounting and compliance support, and another 3%–4% on investment and planning specialist support. For a total of more than 15% of revenue. Which means if advisor platforms can solve for some/most/all of this, they could ‘charge’ advisors ‘just’ 12% of their revenue to provide staff support, and it would save advisors nearly 20% on their internal staffing costs (cutting staffing costs by 3% of revenue from 15% to 12%)!
By contrast, the Investment News benchmarking study shows that advisors typically only spend an average of 3.7% on technology (some of which is simply computer hardware and office equipment), which means even if an advisor platform can cut an advisor’s technology costs by 20%, the advisor’s costs drop from 3.7% to 3.0% of revenue… saving them less than 1% of their revenue (which is neither all that much value to the advisor, nor much value-creation for an advisor platform to charge advisors and build a business on!).
Simply put, providing services to financial advisors is a substantially – 3X to 4X – bigger business opportunity than simply solving for their technology needs!
And notably, services are arguably also far more economical for advisor platforms to build in the first place, as the fundamental challenge of technology is that it can take millions of dollars to build just one truly unique and proprietary technology solution (and many multiples of that to fill out the entire tech stack an advisory firm would need). Which is a huge cost for most advisor platforms to build… especially since it all has to be invested upfront before any value is created (and before any revenue can be generated!). For which the value itself is also still limited… as even if an advisor platform builds a solution that cuts the cost of a popular solution in half (e.g., from $1,000/year to just $500 for the same platform-built software), across 500 advisors, that technology build generates ‘just’ $250,000 of annual savings for their base of advisors, after the platform spent millions(?) to build it!?
Whereas with a service, such as providing Operations support, an advisory firm might have hired a staff member for $50,000–$75,000 in salary-plus-benefits (depending on location and the local cost of living), not to mention the additional cost to search, recruit, onboard, and train. If an advisor platform can attract and retain several Operations support staff and make them available to the platform’s advisors on a cost-effective fractional basis, advisors could save thousands, or even tens of thousands, of dollars!
And the platform that hires Operations support staff for their advisors can put them to work right away generating revenue for the firm. There’s no 6–12+ month technology build cycle to hopefully generate revenue. Hire a team member to provide a service to advisors, then get paid for a service as soon as they’re onboarded and trained. It’s far more of an economic opportunity for the platform and more of a financial savings opportunity for the advisor. ‘Everybody’ wins faster!
And as an advisor platform’s service lines grow, further reinvestments into systems, process, infrastructure, and even technology – to make the platform’s own services run more efficiently – create additional economies of scale of time, allowing the firm to provide even better services, for an even lower cost.
The Ongoing Evolution Of Advisor Platforms To Tech-Enabled Services
The emerging transition of advisor platforms from a focus on technology to a focus on services is profound – as profound as the shift nearly 30 years ago as platforms transitioned from their focus on (proprietary) products to technology in the first place.
From the platform perspective, it will be driven first and foremost by the sheer growth opportunity that it represents. As in today’s environment, independent broker-dealers, in particular, have continued to struggle with the ongoing margin squeeze of competition for giving the ‘best’ advisor payouts – driven by a fundamental reality that because product shelves are open architecture and technology is increasingly commoditized (as more and more platforms offer the same suite of third-party technology solutions), the only remaining way to differentiate is on ‘price’ in the form of higher payouts. Which most independent broker-dealers have been whittling down to charge 8% to 12% (allowing for 88% to 92% payouts) for what is primarily a combination of compliance and technology solutions, and still losing market share to the RIA channel… because, as the benchmarking studies note, most independent RIAs pay only 4% to 6% for their compliance and technology support in the first place (which helps explain why some hybrid platforms are starting to offer an even higher-than-B/D payout to their RIA channel).
By contrast, the typical advisory firm spends as much as 15% of its revenue on back-office people – administrative and operations staff, along with investment and planning support and other professional services – which gives advisor platforms a nearly 3X opportunity to add value to each advisor (or even higher if the advisor platform also provides the technology support, too). And in a world where advisor platforms struggle to grow because the total headcount of financial advisors has been stagnant, and recruiting costs have become increasingly prohibitive, the potential to 3X revenue-per-advisor without increasing the number of advisors by providing services to them is a tremendous internally-oriented organic growth opportunity for most advisor platforms.
Furthermore, by building a high-quality suite of services that directly address the hiring and staffing pain points that advisory firms already face, advisor platforms also have the opportunity to more substantively differentiate and ‘de-commoditize’ themselves, which reduces the pressure on payouts altogether, re-orienting the conversation when recruiting and retaining advisors towards the unique value of the services they provide and the (potentially) unique ability that particular advisor platform has to execute them well. As ultimately, while lots of advisor platforms might roll out administrative, operations, paraplanning, trading, and other support functions… not all will execute them with equal quality. Which provides a real opportunity for those who can execute well to meaningfully stand out.
In turn, if advisor platforms become more focused on services, expect to see more surveys, studies, and tools that rate advisor platforms on their services. As the ironic reality is that as competitive as advisor platforms are, there are almost no tools or services that rate and score those platforms on their quality and capabilities… a tacit marketplace recognition of just how commoditized most advisor platforms have become (that the only thing left to evaluate is ‘price’ in the form of payouts). Whereas because one platform really might be a lot better than another in the quality of its advanced planning team, or its trading team, or its administrative staff support services, advisors will increasingly look for information to determine which advisor platforms really provide the best services.
The caveat, of course, is that ‘just roll out (high-quality) services to your advisors’ is far easier said than done. Not just because it’s hard to build (and especially to scale) a good service business, but also because many of today’s advisor platforms are so focused on facilitating products and investment portfolios that ‘services’ – the actual ongoing support services that their advisors pay for – are not part of the firm’s DNA, and will represent not just a shift to its offering and value proposition but to its culture and even its leadership.
In addition, the reality is that not all advisors are trying to build the same type of firms and serve the same type of clients… which means not all advisors will need (and be willing to pay for) the same types of services. As advisors who work with very high net worth clientele may rely more on the depth of the advisor platform’s ‘advanced planning team’ and the capabilities of their ‘investment research team’ to analyze complex private holdings, while those who work with mass affluent clients (and a much higher volume of them) may be more focused on the capabilities of the firm’s administrative and trading teams to handle the higher volume of ongoing client support requests.
And advisors who have built larger firms themselves – which means they might need a whole team to provide service support – will be very different than advisors who have mostly built lifestyle practices and simply want to engage service from their advisor platform’s array of part-time virtual assistants providing 10-20 hours/week. Similarly, advisors who are focused on fast growth will look to their advisor platforms for service capabilities around marketing support, while advisors who have reached a mature stage of their business and are more focused on harvesting profits than reinvesting for growth will have little appreciation for that centralized marketing support.
All of which means that advisor platforms, in order to build and especially to scale their services, will be similar to advisors who have to get clearer themselves on their own ‘ideal advisor persona’ that they are building and scaling their services for.
Notably, for advisor platforms that are successfully rolling out, building, and scaling up their services to advisors, ‘technology’ will likely re-enter the picture again… not in the form of (increasingly commoditized) technology that’s offered to their advisors, but as technology they use to scale their own systems and processes to better deliver their services. Which, in turn, will give the leading advisor platforms their own form of further differentiation with their own proprietary technology that they use to power their services… completing the evolution into a ‘tech-enabled services’ provider.
Ultimately, though, the key point is simply that advisor platforms are on the cusp of a transition to a new era – from platforms that differentiated largely on their technology to becoming (tech-enabled) service providers instead. And while services may not have the appeal – or margins – of technology companies, advisory firms face real challenges of being labor-intensive staff-service service businesses… which gives advisor platforms new opportunities to grow and scale by solving the biggest challenge that most advisory firms face, which is how to handle and resolve all the staffing and overhead needs beyond what widely-available tech already solves.
And providing these tech-enabled services represents a significantly larger business opportunity and need for advisor platforms to solve than ‘just’ offering compliance and technology alone. A need that the right advisor platforms can uniquely position themselves to solve… with a differentiated tech-enabled services solution of the future?
