The competition for getting a financial advisor's attention has never been fiercer... which in recent years has led to an explosion of increasingly aggressive wholesaler efforts to try to get in front of advisors, especially in the RIA channel. The volume of inquiries has risen so much, most advisors don't even have the time to politely say "no" to all the requests, and instead are increasingly adopting a "don't call us, we'll call you if we want information" approach, or simply going directly to the websites of product manufacturers for the information they need. Which means asset managers, insurance companies, and other financial services product manufacturers need to find new and innovative ways to reach advisors in the first place, to get their investment, insurance, and annuity products to market.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at an emerging trend of investment and insurance product distributioin: the idea of technology itself as a product distribution channel to reach advisors... and the opportunities, innovations, and conflicts of interest that arise from such arrangements!
The most apparent starting point for this shift of technology as a distribution channel was the rise of the robo-advisors. Robo-advisors first started gaining real momentum in 2014, and it was around this time that asset managers – particularly fund managers – began asking, "Do we need to launch our own robo advisors, or risk being excluded from the trend?" But the reality was that there was nothing unique about robo-advisors that required the use of ETFs. Effectively robo-advisor technology was simply a way to gather assets and execute a managed account, which means the technology was basically just another distribution channel for the asset manager - companies that could get their products into the managed account wrapper were the winners. And so, after Schwab picked up over $2B in assets in just their first 3 months of Schwab Intelligent Portfolios - comprised nearly 70% of Schwab's own proprietary products - BlackRock decided to acquire FutureAdvisor to distribute their iShares ETFs, Invesco bought Jemstep to distribute PowerShares ETFs, and WisdomTree invested heavily into AdvisorEngine to distribute WisdomTree ETFs, as asset managers began seeking robo-platforms that they could put their funds on and offer the technology to advisors – turning the robo-advisor into a distribution channel (and owning your own robo-advisor as a vertically integrated distribution strategy).
Over the past year, this evolution of technology as a distribution channel has gone one step further, with the rise of the so-called “Model Marketplace”, where advisors can select third-party investment models, and then have trades automatically executed in the advisor's own portfolio management or rebalancing software tools. The distinction from the early robo-advisors like Wealthfront, Betterment, FutureAdvisor, and Schwab Intelligent Portfolios was that advisors remain responsible for (and in control of) placing trades, although that trading is made very easy by the technology. However, the caveat for such portfolios was that in order to use them for free, advisors typically must use pre-fabricated models in the marketplace... which are often made by the asset managers, and include their own proprietary funds. In point of fact, the technology is so becoming a distribution channel, that now asset managers are starting to subsidize the cost of advisor technology, just to have a chance to get their funds into the hands of the advisors that use the technology! And notably, this trend isn’t unique to “just” rebalancing software and model marketplaces, as financial planning software such as MoneyGuidePro and Advizr have begun to partner with product companies to easily recommend appropriate insurance or investment products where the client can open the account or apply electronically on the spot from within the planning software itself!
And despite the rapid push towards new technology channels, I suspect we’re still in the early phases of this transition to the idea that Advisor FinTech itself can be a distribution channel. From the technology company’s perspective, the good news of this emerging channel is that it provides a new source of revenue for companies, especially since advisors have already shown far more willingness to have technology costs borne by the expense ratios of insurance and investment products, rather than by paying for the software directly from their own Profit and Loss statement.
However, with this new distribution channel will come new innovation, opportunities, and conflicts of interest – as technology companies struggle with everything from overcoming the same growth problems that robo-advisors faced in the first place (as it's very hard to grow user adoption, and existing incumbents with existing brands can easily leapfrog new entrants), to technology companies navigating the mid-point between the conflicts of getting paid for product distribution and trying to satisfy independent fiduciary advisors (as the recent debacle of TD Ameritrade’s ETF Market Center illustrated).
The bottom line, though, is simply to recognize that a major shift is currently underway. As advisors increasingly adopt the technology, the technology itself is becoming a distribution channel for products that asset managers, insurance companies, and annuity companies, who seem very willing to pay for access in a competitive marketplace. Which means more new tools and innovation for advisors. But also tools with a whole new range of conflicts of interest that we’ve never had to deal with before!
Welcome, everyone! Welcome to the 49th episode of the Financial Advisor Success Podcast!
