Most advisory firms that do “wealth management” – some combination of financial planning and investment management – will have three core technology platforms they use: portfolio accounting software to track the investment portfolios, financial planning software to build the financial plans, and CRM software so you can just keep track of all the clients. And this software will come with a cost, but one thing that’s interesting about financial advisor #FinTech, is how much (or how little) we are willing to pay for different types of software.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we examine how financial advisors pay for different types of technology, why these dynamics influence how much we are willing to pay for software, and what this means for the future of financial advisor #FinTech!
As a starting point, just consider how much this software costs for a typical advisor to use. CRM software in our industry is typically about $500 to $1,000 a year. Financial planning software is a little more expensive, with packages like MoneyGuidePro or RightCapital at about $1,000 to $1,500 a year (and some, like eMoney Advisor, are a bit more expensive at over $3,500 per year). Portfolio accounting solutions, though, are typically the most expensive at all, with costs like $40 to $70 dollars per year per account, which means 80 clients who each have an average of 3 accounts leaves the advisor paying about $10,000 to $15,000 per year. Which raises the question: why the huge discrepancy, and why are advisors willing to pay so much more for some software solutions that others? Or stated more simply, why isn’t there a $15,000/year financial planning software solution, as there is for portfolio accounting software?
We can gain some insight by looking at the typical financials of an advisory firm. The classic advisor’s Profit and Loss statement reduces gross revenue by both Direct Expenses (the costs it takes to actually get the revenue in the door and service it, such as client-facing advisors), and Overhead Expenses (e.g., administrative staff, rent, E&O insurance, and technology) to arrive at the bottom line: Net Profits. In essence, there are two primary “categories” of expenses here, direct expenses that produce the revenue, and overhead expenses that support the operation of the business, like admin staff and office space and technology.
The reason this distinction matters is that typically, we will pay a lot more for direct expenses than we will for overhead expenses, precisely because the cost tends to produce more revenue and it “pays for itself” over time. Yet while advisor technology is typically classified as an overhead expense of the business, but it’s not actually always the way we think about the costs when we decide what to buy. After all, for advisors running the typical assets under management model, the reality is that portfolio accounting software isn’t really just an overhead expense, but more of a direct expense, because advisors need portfolio accounting software to validate their AUM fees. By contrast, even for firms that do rigorous financial planning as part of their AUM fee, the planning software isn’t a core requirement for generating that AUM fee. It’s still good to do good planning work, but you can do good planning work more profitably by reducing the cost of this overhead expense! Thus, we’ll pay 10 times the cost for portfolio accounting software than financial planning software because, when we run an AUM model, we think of portfolio accounting software as something that drives revenue, while financial planning software is just a cost to be managed. And pay accordingly.
In fact, if you extend this line of thought further, it actually becomes clearer why and how it is that even within existing advisor technology categories, some software providers charge a lot more than others. For instance, while financial planning software is typically an “overhead cost to be managed”, MoneyGuidePro costs about $100 a month while eMoney Advisor costs over $300 a month. Both are good financial planning software packages, but what eMoney Advisor does have, that MoneyGuidePro does not, is its client portal. And it matters, because when clients link all their accounts to the portal and engage with the portal, they tend to be “stickier” clients, who are less likely to leave, and therefore the firm has a higher retention rate and keeps more revenue. Thus why eMoney Advisor charges triple the fee of MoneyGuidePro… and similarly why Riskalyze charges nearly double the price of FinaMetrica… because that is what happens when software is positioned as a revenue driver (that can be used for business development and revenue growth and retention), instead of an overhead cost!
And the other reason why all of this matters is the implications for the future of advisor technology. As more and more advisors converge on the AUM model, it’s getting very competitive to gather new assets, and it’s driving advisory firms to focus more and more on financial planning to differentiate themselves (or even become their primary revenue model). And as investment management shifts to the background as a “supporting service” that financial planners offer, there’s going to be immense pressure on portfolio accounting software solutions to bring their costs down, as they get shifted from a revenue-driving software to an overhead expense to be managed. At the same time, if we are primarily in the business of doing financial planning and financial planning fees are driving our revenue, then we will also pay a lot more for financial planning software as a revenue driver. And if advisors were will to pay $15,000 per year for financial planning software, how awesome could that financial planning software be!?
The bottom line, though, is just to recognize that it is the ability of software to drive revenue that makes us willing to pay so much more for some software than others. And with the coming divide between advisor technology for planning-centric firms and investment-centric firms, we’re going to see a shift as increasingly financial-planning-centric firms that typically treated planning software as an overhead expense to be managed begin to treat it as a direct expense to generate revenue, while simultaneously beginning to cut back on portfolio management expenses (including portfolio accounting software). Which may mean some big changes for the future of advisor technology, as it is exciting to think about what some software types could look like if advisors were willing to pay 10X more than the tools they currently use!
source https://www.kitces.com/blog/how-advisors-pay-for-fintech-cost-of-revenue-vs-overhead-vs-clients/?utm_source=rss&utm_medium=rss&utm_campaign=how-advisors-pay-for-fintech-cost-of-revenue-vs-overhead-vs-clients
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