“There is a large and growing stakeholder group of fee-only advisors that are locked in a battle with every custodial platform to game the custodians’ commission system for the benefit of their clients because that’s how you look good as a fee-only advisor.”
— Michael Kitces, Publisher, Nerd’s Eye View
Michael Kitces began his career as a life insurance agent, which led to his discovery of financial planning. He holds one Master’s degree in Financial Services and one in Taxation, along with a CFP, CLU, ChFC, RHU, REBC, and CASL. Michael is a Partner and Director at Pinnacle Advisory Group, Cofounder of the XY Planning Network and AdvicePay, Publisher of the Nerd’s Eye View blog and Host of the Advisor Success podcast Kitces & Carl.
Now hit the Play button!
This episode of Wealth Management Today is brought to you by Ezra Group Consulting. If your firm is evaluating new technology or looking to improve your current wealth platform, you need to contact Ezra Group. Don’t spend another day using technology that doesn’t offer an elegant user experience. Your advisors and clients deserve better and you can deliver it to them with the help of Ezra Group.
Topics Covered in this Episode
- WealthTech vs. AdvisorTech
- Innovation in AdvisorTech
- XYPN AdvisorTech Competition
- Fee Only vs. Commission Based Platforms
- Are There Too Many Apps?
- RIA Platform Battle
Companies & People Mentioned:
- AdvicePay [18:21]
- Altruist [43:10]
- Asset-Map [16:44]
- Betterment [45:35]
- Charles Schwab [38:19]
- College Aid Pro [16:55]
- Dimensional Fund Advisors [53:42]
- E*TRADE Advisor Services [49:13]
- eMoneyAdvisor [36:50]
- Envestnet [38:16]
- Fidelity Investments [49:14]
- FinaMetrica [11:14]
- Folio Investing [52:18]
- Holistiplan [13:07]
- Junxure [16:38]
- Knudge [17:02]
- New Planner Recruiting [19:37]
- Orion Advisor [16:43]
- Pershing [38:18]
- ProTracker [16:39]
- Redtail Technology [16:40]
- Riskalyze [11:04]
- Salesforce [38:12]
- Tamarac [16:42]
- TD Ameritrade [38:20]
- Vanguard [53:41]
- XY Planning Network [7:42]
If you are interested in more information about some of the topics Michael and I discussed, these blog posts would be useful:
- 5 Foolproof Tactics for a Successful CRM Implementation
- “Don’t Get Creepy”: Privacy in Wealth Management & Emerging Technology Trends
- Stranger Things Are Happening to Financial Planning Software
- How Cetera’s Risk Profiling With Facial Recognition Can Turn Any Advisor into Dr. Phil
Complete Episode Transcript:
Craig: Welcome to this episode of the Wealth Management Today podcast. My guest is Michael Kitces, who has the following intro; publisher of the Nerds Eye View blog, partner and director of research at Pinnacle Advisory Group, cofounder of the XY Planning Network and co-founder of AdvicePay, host of the Advisor Success podcast and the Kitces & Carl podcast. Michael, welcome.
Michael: Thank you. It’s good to be here, Craig.
Craig: I’m so happy to have you. This has been something we’ve been planning for months and months and I’m glad you can fit me into your schedule, man. You’re crazy busy.
Michael: Yeah, absolutely. I guess as your intro kind of implied, I wear a few different hats these days. It’s very fun, it gives me a really cool wide look at all the stuff that’s happened in the industry in all directions, and it leads to a slightly over-scheduled life. It’s weird, and sometimes it’s a little tough to fit podcasting in. So I appreciate you working with me to kind of squeeze in this time that we managed to get together.
Craig: And when we planned it like six months ago, so I was looking forward to it. I could have added “commentator, speaker, educator, financial planner…”
Michael: I wear a lot of different hats, what can I say?
Craig: “Twitter upset-er…”
Michael: Yes, probably a lot of that “Twitter upset-er”, I do like to just say it how it is, and we have an interesting industry these days. I think there’s both a lot to say about it as we’ll talk about today, and just a lot to do about it. At the end of the day, part of why I’m involved in so many different businesses is I’m just one of those people that when I look at the landscape, I see the gaps, I see the holes. I see the, “Hey, why isn’t anybody doing this thing?”
Michael: Even in terms of my own career, I think I spent the first 10 years of my career just living the advisor industry and dealing with all those things. And then I spent about 10 years of it commentating on those things. So we’re running our Nerds Eye View blog and doing a lot of speaking for the industry. And now, as I’m into my forties, I’m kind of at that career stage where I’m ready to stop just commentating about these problems and start actually solving them myself – or not myself, but bringing together people in teams and building businesses, to solve them. And now suddenly I find myself involved with about eight different businesses that are trying to solve a lot of different problems or challenges and opportunities in the advisor landscape.
Craig: Yeah. And you made a comment earlier before we started, where you said something you do in your “spare time” and I’m calling BS on that because you don’t have any spare time. It’s impossible.
Michael: No. Yeah, that’s true. There’s really not a lot of spare time at this point. I work, I sleep, I play with my children, and that’s about it. And fortunately most of that happens in the same space. I mostly work from the home office these days. I’m only in our advisory firm office or our XYPN offices, a limited portion of my time. Having an office down the hallway from my bedroom and walking across the kid’s rooms on that daily 12 foot commute, it definitely makes it a little bit more manageable for a crazy life.
Craig: I hear you, I’ve got the exact same setup and you can’t beat it. But you mentioned XYPN and I want to talk about XYPN, and I want to talk about the recent AdvisorTech Competition. Notice I didn’t call it the FinTech competition.
Michael: Yes, the AdvisorTech Competition. I appreciate that. We have this naming challenge right now of what to call this technology that’s cropping up in our industry. We called it a FinTech for a while, but I feel like functionally most things FinTech these days, it seems are basically payments companies and blockchain companies that want to change the entire world and have multibillion dollar unicorn market caps.
Michael: Then we got this category of wealthtech, which I think in practice kind of became a little bit of a euphemism for wealth management, i.e. investment management and essentially where your portfolio design and management tools, so-called robo tools that get used by enterprises. Not that there’s anything wrong with that, or those tools or what they do. But I view us as an industry in transition from people that we called “financial advisors” and (air quotes), but functionally they were product distributors. We sold insurance and investment products either for our captive companies or as intermediaries through distributors, otherwise known as broker dealers. Now we’re getting into this world where we’re actually in the advice business for the sake of giving advice. And when you’re really in the advice business, you need a whole different set of tools and technology that largely don’t exist today.
Michael: Part of the reason why we created our FinTech competition at XYPN Live was we wanted to create a space for this new next generation of Advisortech, specifically tools and technologies to support advisors doing the business of advice. And we have a particular focus on trying to support smaller, startup firms.
Michael: Our FinTech competition is all new firms by requirement, either less than a million dollars of revenue or launched in the past 12 months, just to make sure we’re supporting startups and innovation. They all have to specifically help support the delivery of financial planning services to next generation clients. XY Planning Network is for financial planning for Gen X and Gen Y, thus the X, Y, and so the XYPN FinTech competition is specifically around technology, advisortech that supports next generation financial planning from new startup companies that are doing cool new stuff. What we’re getting now are companies where the majority of what’s coming to the XYPN Advisor Tech Competition are whole categories of companies that have never existed in the advisor space before.
Craig: That’s shocking because you go to more conferences than I do, and I go to a lot of conferences. And just to see something new, we’re always surprised – but to see a whole bunch of things that are new in one space in one time period is just unbelievable.
Michael: Yeah. And it’s something I’ve become particularly attuned to because one of the resources now that we’ve been publishing for the past year or two through Nerds Eye View is what we call the Advisor FinTech Map. I’ll probably rebrand it to the AdvisorTech Map, but two years ago that wasn’t a label. So we called it the Advisor FinTech Map and we just lay out for advisors all the different software that exists in different categories. The players in financial planning software and portfolio management software and CRM and B2B robos, and all these different pieces. It’s kind of a strange thing unto itself.
Michael: We created the map, in a very literal and positive sense, to be a map. If you’re trying to figure out where to go to get software to fill in this particular category of problems as an advisor. Here is a map of the companies that do this, so you know where to go. And frankly, what it’s become in practice for some people, is kind of a punchline to a joke. You know, “dear enterprise or dear advisor, you’re trying to find some technology, here’s a map of what it looks like”, and there’s a bajillion logos on the map. I didn’t design it to be a punchline, but it is what it is. The market does what it’s going to do with your solutions, this is a business. A creator sometimes has got to put them out there and see what happens. But we have all these categories with a zillion entrants, and that’s fine, I’m all for good competition. But what’s starting to happen as we move from being distributors to being advisors and needing not just FinTech but real advisor tech, is we’re starting to create new categories on this map that didn’t exist before, and new companies are cropping up to fill these new categories.
Craig: Do you feel that there really hasn’t been much innovation in our space? There’s been some, but not compared to other technology spaces. You mentioned payments and banking, they’re the firms that are coming and going very quickly. I haven’t seen a lot of that in wealth management until just recently.
Michael: Yeah, agreed. I think our space has frankly been kind of staid over the past 10 years or so. I do think we’re starting to see a little bit of innovation right now. But even when we look at the FinTech map, a lot of the new entrants for companies over the past two to three years are mostly just additions in existing categories. Riskalyze went big and there’s eight new entrants in risk tolerance software in the past five years after having been basically nothing for 15 years. FinaMetrica was the one and only player from the late 90s until essentially Riskalyze showed up 10 to 15 years later and there was nothing in between.
Michael: Now there’s six to eight new entrance in that category. Portfolio management, investment management, got a whole bunch of entrants. B2B, robo overlay has got a bunch of entrants, financial planning software, got a bunch of entrants. Those are sort of the existing stable categories, so more people keep coming in. But hey, I’m happy to look at the 17th financial planning software to compete against the other 16, but I don’t feel like we’re seeing as much innovation when someone just becomes 17th competitor in the category.
Michael: The ones that are interesting to me are the whole new categories that are cropping up. We’re tracking five companies that do student loan planning. That category didn’t exist two years ago. We’re tracking a whole bunch of software that just does retirement spend down decumulation planning. There was almost nothing there in the past. We’ve got a whole category of behavioral assessments tools with clients, how to actually understand their spending and investment behavior preferences, not risk tolerance, but are you naturally wired to be someone who likes to keep up with the Jones’s or not? Because if you are, I know we’re going to have spending problems and if you’re socially indifferent about your spending, you’re going to be much easier to coach on savings. And so we’re starting to see these new categories begin to crop up, and to me, that’s where the exciting innovation now is starting to come.
Craig: That’s something I’m seeing as well, that we’re finally getting some innovative ideas that are coming out. And I wanted to go through a couple of the firms that were at XY Advisor Tech Competition. So let’s just go right from the top and talk about the winners. So let’s talk about Holistiplan.
Michael: Yeah. So our winner was Holistiplan. Entirely new software company, in an entirely new category. They’re doing dedicated tax planning software, and “tax planning” for Holistiplan is kind of literal for what they do. They take a client’s tax return, they scan it, with a whole bunch of machine learning algorithms about how to pull in all the different information from a client’s tax return, and they turn it into actual planning recommendations and observations for clients. Here’s your client’s tax bracket. Here’s how much they are, or not saving for their retirement plans. Did you realize that they’d actually be eligible for this retirement plan?
Michael: They could do more, but they wouldn’t be eligible for that retirement plan cause their adjusted gross income is too high, which we already know because we pulled that off their tax return. It looks like they’re not itemizing deductions, but they’re in a low tax bracket, so maybe we could focus deduction strategies here and do a Roth conversion over here to fill up this tax bracket because here’s the client’s low marginal rate, and so on.
Michael: They’ll take a 500 page tax return that might take an advisor 30-60 minutes or two hours to review (and depending on the advisor, they may or may not actually have the best skillset to evaluate a tax return in detail), and Holistiplan scans it and serves up all of their results in about seven seconds, which they did as a live demo on the site at the FinTech competition just to show it and prove the point.
Michael: So you take what, four in depth advice firms, right? Not just the product distributor firms that don’t tend to go very deep on taxes, but the firms that are deep in advice that tend to go deep on tax planning, that might spend cumulatively over the year, an hour per client per year reviewing their latest tax return and trying to get a handle on the planning opportunities, which could be 50 to 100 hours in the year of work time for an advisor or a pair of planners and they turn it into seven seconds per tax return, with all the observations and potential strategies queued up. Then you just decide what you’re going to move forward with.
Michael: What a massive leap forward in advisor tech. We’ve never seen any software, anything like this, and their software gets it done. It’s reasonably priced per tax return. It comes out to be a couple of dollars per tax return if you’re doing this actively. Which means that when I, as an advisory firm owner, have to pay an associate planner to do that tax return analysis, I’m getting a bajillion percent ROI on the Holistiplan software and almost every software that was in the advisor tech category for us at the competition. This was built by an advisor who did this for 10 years in his firm and said, this is a pain in the butt. I’ve got some programming knowledge that I think I’m going to put to use. And he left his job as an advisor to start a software company solving this problem.
Craig: It sounds like a common thread. I hear this story a lot. It sounds like Adam Holt at Asset-Map.
Michael: Oh, so many. When you really look at it, the overwhelming majority of the major players in our advisor tech space are all what I call the homegrowns. The homegrowns are: advisor has problem, can’t find solution, gets aggravated, makes own solution, friends hear about solution and want to buy it too, ends up with software company on the side. Juncture, ProTracker, Redtail, Tamarac, Orion, Asset Map, all of these companies come out of the homegrown journey and now we’re seeing it continue.
Michael: Holistiplan was a homegrown build, College Aid Pro, which was at our Advisor Tech Competition was a homegrown and a platform called Knudge was at our competition. It was also a homegrown, it was built by an advisor who said it’s really aggravating actually helping clients track and monitor all the financial planning or to do’s they’re supposed to do on an ongoing basis. So he made a program aptly called Knudge that helps nudge clients around that. Because in a distributor world, where advisors mostly sell and distribute products. All I need is a sales CRM that builds up to the sale, and once I close the sale, I’m done. Well, when you’re in the advice business, that first three-month process with a client is just the first three months of the next 29.7 years I’m going to be working with clients.
Michael: And we actually have almost nothing that helps support clients for the subsequent 29.7 after the first three months of the financial planning process. And so up come companies like Knudge that say we’re going to solve this particular problem because we know advisors have this pain point because they live it as an advisory firm as well. They made a solution for themselves and now they’re selling it to the rest of the advisor community.
Craig: And I’m going to make a confession here. When I first, when I saw the name, I thought it was Kuh-nooj, because I’m a Monty Python fan. So I was like, “Oh, Kuh-nooj, what a great name for a company!”
Michael: Yes, the joys of naming a firm. I mean this was why even our platform, we build AdvicePay as a homegrown, we have this problem with XY Planning Network that our advisors do financial planning for a monthly subscription fee. That was kind of the model we invented and put on the map five years ago. But there were no payment processing solutions to actually help you do that. And most of the existing payment processors won’t actually work with you and his advisor if you tell them that you’re an advisor, cause they don’t, they basically don’t know our industry regulations, they don’t want to touch them. So they just banned financial advisors from their platform. If they find out you’re doing it, they’ll shut you down.
Michael: And so we made this software to solve the problem for our XY Planning Network members. And then other RIAs heard we were building it. So we spun it off as a separate company. And then enterprises heard that we were doing it and you know, large hybrid BDs have this problem at scale. So we went and raised some additional capital and ramped up an enterprise solution. But cognizant of the naming challenges, I’m very much a fan of just naming companies for what they are. AdvicePay, guess what we do – no one mispronounces it.
Craig: Exactly. You’re not into the, as I call it, the pharmaceutical naming convention where you pick a random term.
Michael: Yes. And then just make it mean something. Yeah. I’m, you know, AdvicePay, guess what we do. You know, I’m also a partner in a business called New Planner Recruiting. Guess who we recruit?
Craig: Hmm. Let me think about that.
Craig: I want to take a little break from this episode to talk to you about one of my favorite sponsors. The Invest in Others Foundation, Invest in Others as a nonprofit. You can find them at investinothers.org and they look to raise money and give out donations, and they give out awards to charities that are sponsored by financial advisors. So it’s financial advisors’ favorite charities or charities that they spend a lot of time supporting. So Invest in Others, it looks to get sponsorships from the industry and funnel that money to advisors’ favorite charities. I really like this charity, this nonprofit. I think you should take a look at it again, Investinothers.org. They’ve got a couple other programs. One is a Grants for Good program. Again, delivering money to different needy organizations and needy groups. They’re also starting a corporate awards program, which is going to be a little bit different, but still within the industry. Another way for financial services, wealth management corporations to help donate money to people in need. So I really like invest in others. I think you should take a look at it. Invest in others. Let me spell this for you. InvestInOthers.org.
College Aid Pro
Craig: I’m gonna back up a second. So I’ve got children in college and I’ve got a child who’s planning as a junior in high school. So College Aid Pro peaks my interest right away. So why is that unique? All the financial planning software out there has college tools. You can pick the college, and it will show you how much it costs. What’s different about College Aid Pro and why do I need it?
Michael: Yeah, so the college tools that are in financial planning software today, to the extent we have them and some don’t even have what you just described, but if you at least go as far as what you just described, those tools are distributors, sales support tools, what they essentially do is help you show, Hey, little Johnny wants to go to Harvard. Here’s how much Harvard’s going to cost in 17 years. Now that I’ve scared the bejesus out of you with how much money you need to save, we’re going to help you save a whole bunch of money, which coincidentally is going to a 529 plan that I got paid to manage.
Michael: So basically, the software is built to show you you’re going to need a giant pile of money and I’m here to help you save it. And not that I’m negative on that, because college is really expensive and you need to save a big pile of money to do it. But it’s essentially built for demonstrating the need to save in the thing that the advisor has to sell. What it’s not built to do is help you plan how you are going to pay for college. And particularly in a world where, granted, a subset of affluent flop clients who do tend to be the people that a lot of advisors work with, are just going to be private paying their own way all the way through. For a lot of people, there are some opportunities to leverage various forms of financial aid that may be merit aid, that may be scholarships, that may be loans, there are loans that get special interest treatment and some that don’t and some that are private and some that are public. And the rules are actually ludicrously complex.
Michael: Most planning software are really good if your kid is five to 20 years away from college. They say, you need a giant pile of money, so that you’re scared and save a whole bunch and then I’ll take your money and invest it for you for that savings journey. But they become useless once you are within three or four years of going to college because they don’t tell you anything about the actual cashflows about how you are going to pay for college. And that’s what College Aid Pro was built to do. It’s built by a planner named Joe Messenger, who did this in his own firm. Joe’s great observation in the marketplace is that what most people do is they go pick a college and then they try to figure out how to afford it. And then you get all sorts of problems. Like little Johnny really, really wants to go to this school, but you can’t afford it. But now the parents don’t want to let little Johnny down. So we all borrow more money than we should because he got hooked on the college.
Craig: Or parents want the sweatshirt of X, Y, Z college.
Michael: Joe’s approach says, Look, let’s actually take in all of your household information, your finances, your income, how that would map onto the FAFSA, which is the financial aid forms, and let’s figure out what you can realistically afford. And we’re going to call that your college pre-approved amount, right? I get pre-approved for a mortgage and then I go shop for a home I can actually afford. Joe essentially built a pre-approval for the college process using all of the frankly painfully complex (that are conducive to software) formulas about how financial aid and affordability works and how the loans work and how scholarships work and how actual cost of attendance is calculated, which is a messy thing unto itself to try to help people figure out, here’s what you can actually afford for college, here’s what you are pre-approved for.
Michael: Now let’s figure out what schools fit that, recognizing that, well you can’t even just look at the list price of the college because the list price of the college may not include the merit scholarships your child is eligible for, may not include tuition cost, scholarships that are common for a whole lot of schools. The anticipated cost of attendance is not the list price. In fact, schools have actually found it helps to list a higher price and then give a bunch of discounts because then people want it more because they think they got an awesome discount.
Craig: They’re realizing how sales work, right?
Michael: Yes, and so you can’t even just look up what the college costs to actually get a realistic reflection of whether you can afford the college. And so College Aid Pro brings all this together into a really deep interface of navigating clients through, Here’s your financial information, not just your assets saved in 529 plans, but everything, here’s what you may be able to qualify for either need-based or merit-based. Here’s what a realistic cost of attendance actually is, given all the tuition discounts and other things that these schools provide, and let’s figure out what school you would really go to that fits with and what the true financial tradeoffs are. Not based on the list price but true cost of attendance after true aid calculations.
Michael: It’s a level of depth about how to actually navigate and manage the financial aid and student loan process, now like a $1.5 trillion problem in this country, it’s an immense planning opportunity as I’m sure you’re experiencing with college aged children. It’s an area of some stress for a whole lot of parents. And we’ve never had software that could do anything to help parents that were within three years of college or with kids in college until along comes College Aid Pro built to do this.
Craig: Yeah, and also layer on top of that what your child’s GPA is and their test scores.
Michael: Correct. And they take all of that information in so you can figure out, Hey, you know your kids are gonna qualify for $8,000 of tuition discounts over the next four years because their SAT or ACT scores alone qualify them for an automatic merit scholarship at this college but not these other two. Would that be helpful information to know? Absolutely. That’s an $8,000 deal that I would’ve had spent a couple of hours on the internet searching for and their software already has fully cataloged index and just instantly shows you as soon as you start putting information in.
Craig: This is another great tool that most advisors don’t think about. Then like I said, they’re just showing you how much money you need rather than really being an advisor to other parts of your life.
Michael: And to me again, this is the distinction between wealth tech and these tools that were really at the end of the day built around accumulating assets, (that we manage) which ain’t a bad business, I’m a partner at a firm that does that so I’m not negative on the business. It’s very different when you get into what tools we actually need to deliver more effective advice. And that’s where we get into, well I need a deep tax return analyzer, like Holistiplan. If I want to give tax return advice and I need a tool like College Aid Pro, if I’m going to give advice on navigating financial aid, paying for college, for clients, actually going off to college. And then if I’m going to help my clients with this on an ongoing basis, I need a tool like Knudge that helps make sure clients are actually implementing their action items on an ongoing basis. Because people don’t do that naturally. If they did, they wouldn’t need us as advisors. They would just magically be done.
Craig: I need Knudge for my business. I’m a consultant and my clients need to do stuff during my projects and I have to follow up with them. It’s all emails. Here’s the list of things we need you to do.
Michael: And so in essence, Knudge automates that email process so you can keep track of the nudges that clients are supposed to get. And Knudge either gives you, you know, automation to that or templates you can modify, lots of different flexible ways that you can do it. But it automates the nudging by emails. And I don’t know if they built it yet or I think they’re working towards it, but they’re hoping to eventually put in text message nudges as well for things that clients probably just need a quick text message nudge, Hey, your meeting’s coming up next week. Just want to make sure we’re still on.
Craig: Yeah, I need that. That’s excellent. And does it link into financial planning software?
Michael: At this point, Knudge is looking first to build integrations to CRM systems. When you think about it from a workflow perspective, CRM is usually where I record client communication activities, right? I called the client, I emailed the client, et cetera. We log it in there. Their first build is over to the CRM side for recording all of this activity, although I wouldn’t be surprised if the next thing we see them do is start building to the financial planning software, because from the back office end, I record this in the CRM from the front office end. Particularly if I’m actually doing holistic financial planning advice, my clients log into their financial planning software. So the client end needs to be there. But the advisor workflow end needs to tie to CRM. And so they’re kind of building in both directions.
Craig: Yeah. So why did Holistiplan win? Knudge and College Aid Pro sound like awesome applications. So why’d you pick Holistiplan over those?
Michael: Ultimately Holistiplan was based on a couple of pieces. One, the software stands for itself and does what it’s supposed to do. Tax planning and taking in the client’s tax return is a really time consuming process for advisors that are really deep in the advice business. It’s a huge need. There’s just a monstrous, easy to calculate, time ROI and staff labor costs ROI on the software. It does exactly what it does. The use case is crystal clear. And I think the need is very wide because almost any advisory firm that gets deep into their advice processes is having at least some conversations about client tax situations and getting a tax return. Even if they’re not tax preparers and they’re not doing the tax work. Like you have to be taxed sensitive to what’s going on in, in providing recommendations to clients.
Michael: College Aid Pro we thought was certainly extremely capable for what it does, but ultimately is just a little bit of a narrower software platform. If you are working with clients who have college age children and are dealing with that process in the time and the moment as College Aid Pro is, it’s a phenomenal tool for that. But it’s a very deep tool. It will probably have a nontrivial learning curve for a firm that wants to do it because it’s in both a good and bad way. It’s not a lightweight tool. You’re going to go pretty deep into financial aid planning and how cost of attendance rules work and how tuition discounts work and all the rest.
Craig: It is a big deal because for my first daughter, I have three daughters, we spent money on a consultant to do this for us and that was a lot of money.
Michael: But that’s the thing, you spent money on an education consultant to do this, it’s not a traditional domain of advisors. And while I think that means it’s a great business opportunity, particularly when facilitated with software like College Aid Pro, if I’m already doing any level of tax planning work, I can drop a tax return into a Holistiplan, get that thing out and I know what to do with it because it fits my advisor training. I probably wouldn’t be able to do that with College Aid Pro. I would have to go deeper and learn more about this space and then use this cool, awesome tool. But I think that does narrow its market a little bit. And so because of that we didn’t elevate all the way to the top.
Michael: In terms of Knudge, it is an interesting one. We do long-term relationships with clients. We have a 2-3% turnover rate from year to year. And so most clients stay an average of 30 years or more, when you have turnover rates that low. And so we’re very sensitive to the pain of just managing all these client to do’s in the true sense, nudging them. Hey, did you schedule an appointment with the attorney to get your will updated, did you submit that form to do the updated allocations for your 401k plan? All these planning recommendations that we do.
Michael: But the question that did come up from the judges on Knudge was in the long run, from an advisor workflow experience, where does this really live? Do I really want to log into a third party platform of Knudge to do this or do I just want to log into my CRM and then have my CRM queue up the nudges, which may be what they end up with in a workflow perspective. But that’s not what they built. They built their own UI-UX that you log into. The business case that they’re solving is dead on the implementation of it. I think Joel left some questions of, do I really want to buy Knudge, or do I want Knudge to be integrated with my CRM where I only log into the CRM, which is cool, but then show me how that workflow happens and how it works. Or will a CRM system just come along and acquire Knudge and say, Totally awesome, we’re going to integrate this into our software and we’re going to run with this and make this our differentiator, which is a great opportunity. But then I don’t buy Knudge. I buy a CRM system powered by Knudge.
Are There Too Many Apps?
Michael: Well, I go back and forth on this. Part of me feels like yes. And you look at our FinTech solutions map and the sheer number of logos on the map – we have to keep making them smaller to fit them in.
Craig: I was going to say, I need a microscope.
Michael: Yeah, yeah, and we’re trying to keep it on one page, so that the logos get smaller the more companies that we add in. So yes and no. I do worry that we’ve got so much software it’s difficult to navigate. That’s why we made the solutions map. While I use it for some of the firms that I consult with on the FinTech side or the advisor side, I originally made it for advisors because I kept getting all these questions of what companies are doing in business intelligence software for advisory firms. Like, well, geez, I’m just going to make a doggone map that has all the things and show it. You can just go look at the map. You don’t have to keep calling me, no offense, I can’t type all these emails at once.
Michael: So we made it as just a reference guide. But when you look at it, the advisor tech category is getting a bit crowded. And I think the fundamental challenge that we’re having right now is it’s great to see the proliferation of all this new software and all these new categories. But the increasing mantra from advisors is I want it to all integrate and what that really means at the end of the day is I don’t want more things to log into. I want more software that does more things.
Michael: In my business, these are not satisfied but, I don’t actually want more software to log into. So we took that as a deliberate strategy from the AdvicePay ends and we architected the system from the back end. Assuming that while right now you can log into AdvicePay to facilitate client payments, we assume that ultimately our software will be used within other portals that of everybody else’s software because people don’t want more things to log into. And so we even did that as a conscious decision or a lot of it’s more than just that.
Craig: That’s what we call single sign on. It’s more than that. It’s really that you’re task switching constantly.
Michael: Correct. And to me it’s not just about single sign on like, Hey, I love that eMoney and Orion and some of those platforms have a shelf with 47 buttons of all the different things that they’re integrated to and you can click a button and pass through. But from an actual advisor workflow, this saves me no time. I could have just opened a new browser window and clicked my bookmark faster than logging into your software to go to your connected apps page to click on one of those to get a single sign on pass through to a thing I could’ve just logged into last pass in fewer clicks than using your darn integration!
Michael: So I feel that right now we’ve had a lot of companies have do these SSO integrations just so that they can say (air quotes) “we’re integrated”, right? Cause if I just say, Oh, I want more integration, they go to the vendor and they say, Well who are you integrated with? And they put up, Here’s 47 companies we’re integrated with. But then when you get deeper, the integrations are all single sign ons that frankly aren’t even faster than just logging into the software directly. The piece that we’re missing that we’re just starting to move towards is no, no, no integration doesn’t mean single sign on, integration means actually integrating workflows to happen in a centralized place that is not necessarily your software, your app. Because in practice, advisors tend to anchor to one primary platform. It might be a CRM system like Salesforce, it might be their advisor platform through Envestnet, or Pershing or Schwab or TDA, or they may try to do it through their own internal portfolio management reporting systems like Orion. There tends to be a primary anchor system.
Michael: I think the acknowledgement that we’re starting to have in our space is that some companies will win platform battles and everyone has to build to them and everybody else has to position themselves to be an app in the marketplace, which means you don’t try and get people to come and buy your software and come directly to you. You have to be built to natively integrate to whatever the platform is that you are working through. And I don’t see a lot of “app software” in the advisor space being built that way. We all have these aspirations of, Well, my platforms will be so awesome, everybody’s going to come to my website and log into me directly, and we’re only now starting to learn that that’s not realistic. We as advisors don’t like having a bajillion things to log into. It’s certainly pain we feel in our own firms.
Michael: So I don’t know that we have too many apps. I think that we just don’t have enough software that’s built to truly run as an app. If you imagine that you couldn’t get a single thing from the Apple app store until you go to the company’s native website, create an account on their own website, login by the software there, and then you can go back and single sign on from your iPhone to their website to log into their software. Like, no, I just want to hit the button in the Apple app store! I want to have the thing unload on my iPhone and I want to hit the button and it runs on my phone. The app has to live within the ecosystem of whatever platform it’s distributing through.
Michael: And I think we’re in the early stages of that, so it feels disjointed right now because in essence we have apps that aren’t really apps and marketplaces that aren’t really marketplaces. It feels hard to choose, hard to find things, hard to figure out what really works with what, because everybody says integration, but sometimes the integration is just a single sign on that passes no data and does nothing useful. I think that a lot of the marketplace is going to sort itself out over the next few years.
Craig: As it always does.
RIA Platform Battle
Michael: Yeah. I think there are companies that are positioned to be platforms that are going to win and consolidate this push power dynamic. I think there are a few that are positioned as platforms that are probably going to lose, because they don’t hold as much sway as they think. I hope that they do. But you know, what we’ll end up with, it’s more anchor platforms and more real app marketplaces that ultimately makes it easier for startups to get distribution. It’s better work cases and business cases for advisors, and it creates interesting business opportunities for platforms to run new kinds of platform models.
Craig: Yeah. I mean, I wrote about this on my blog probably four years ago. I called the article “The Battle for the RIA integration Hub“, everyone wants to be the hub.
Michael: Everyone wants to be the hub and not everybody gets to be the hub. There are too many hub competitors. You do not all get to be the hub.
Craig: Right. And everyone knows if you’re the hub that everyone’s integrating into, it’s harder to get rid of you. You can replace the smoke in the hub. But it’s very difficult to replace the hub.
Michael: But as companies have learned in other platform spaces, there are a lot of companies that have tried to unseat the Apple hub. But it keeps winning and a lot of companies have tried to unseat them by outspending immense resources to largely lose that battle. You know at best Android, Google got its own unique space and almost no one else can get anything after the top two. So in our industry where there’s just a few platforms that are all trying to be platforms in various advisors segments, ultimately we have too many to win that battle.
Michael: Notably as the advisor business model changes, I think some of the anchor platforms are going to change as well. Most of our platforms today are built around where the money is, where the assets are and as we go from wealth tech to advisor tech, as we go from asset gathering and product distribution into the advice business for the sake of advice, I wonder if the future of advisors is getting paid for advice and not necessarily managing assets. What is your business company’s purpose in the future of the advisor landscape? Not all of them have very good answers to that question.
Craig: No, because it’s the innovator’s dilemma. That’s how their business model is set up. You can’t just say, well I want you to change it. I want you to disrupt yourself. It’s almost impossible. Very few companies can even think along those lines. But another company I wanted to bring up that was in the XYPN advisortech competition this year was Altruist. Would you call them the Robin hood for RIA custody?
Michael: I dunno cause that’s kind of a loaded term depending on what you think of Robin Hood. Um, I don’t know. I don’t mean that as a negative to Altruist or anything, at least for people who think highly of of Robin Hood and it’s disruption or what is trying to do to disrupt the space. Altruist at the end of the day is simply trying to be a modern RIA custodian built on modern technology, not everybody else that’s struggled with innovation and the pace of change in part because they’re still integrating things to stuff that was written in COBOL in 1972.
Michael: When you build this stuff on modern technology architecture, there’s a lot of custodial processes you can do radically faster, radically cheaper, and then try to compete for business with a less expensive platform and a better client experience (which I think ultimately is what Altruist is trying to be). They’re saying, We will be the modern technology next generation, RIA custodian and look at all the awesome stuff that we can do inexpensively and easily that’s still a pain in the butt to do everywhere else on everything from client onboarding and opening accounts into your trading and rebalancing and portfolio management.
Michael: I certainly think there’s a need for a little bit of shakeup and disruption in the custodial space. I think custodial technology in general has still moved slower than it needs to in order to keep pace. And I’m not insensitive to the bajillion dollars that some of those companies spend on their tech development budgets. But I think frankly, some of them are still paying off a debt, a technology debt overhang of having underdeveloped, even in the late 2000s and early 2010s, had their collective “Ohhh” blank moment when the robo advisors launched and they said, Oh my God, I didn’t realize how far behind our technology is.
In 2012 I was still opening accounts with most RIA custodians using faxes with follow up signatures and here comes Betterment where you can open the account, transfer money, fund the account and be fully invested off your smartphone in less than 30 minutes.
Michael: So I think we’re overdue for some kind of technology pressure and maybe a little technology disruption in the RIA custodian space. But the distinction is that your Robin Hood had explosive growth because they gobbled up this giant wave of first time investors investing micro amounts that couldn’t even get onto other platforms, with a very simple entry point to become a stock investor. Like, Hey, you only have $20 a month. Well we’ll let you buy 0.1 fractional shares of Apple until you get a whole share of Apple and you can see what it’s like to be a stock investor. And I think that’s a fantastic thing and it’s really cool, and they’ve certainly gotten a huge number of accounts and brought in a giant new wave of investors who weren’t participating in the traditional system. But it’s not like an advisor world.
Michael: There’s hundreds of thousands of advisors who have no custodian who have just been waiting for their opportunity to have a first tech savvy custodian so they could suddenly start growing their businesses and use a platform like Altruist. The entry to marketplace that Robin Hood was able to take care of bit this giant swath of underserved small investors who were tech savvy and wanted what Robin Hood was offering. That white space doesn’t exist in the RIA world. If Altruist is going to succeed, they have to succeed by taking market share from someone else.
Michael: And now you get into all the dynamics of switching platforms and making changes that is harder for advisors, stressful for advisors, time-consuming for advisors, has real labor costs for advisors, has real threat than not all of your clients are going to come along and be willing to make the change, all to leave a custodian who at the end of the day, it doesn’t charge me anything cause custody is air quotes free. And of course it’s not really free because they’re making money on the cash and the order flow and the other stuff that’s there. But when I don’t pay for my RIA custodial out of pocket, it’s really hard to be a lower cost platform that competes on price in a marketplace where you can only win by getting people to switch platforms.
Michael: And so I love conceptually what Altruist is doing. The pro-advisor, pro-innovator in me, I want them to win for the sake of pushing the whole industry forward with some positive technology pressure. But I don’t know if Altruist will be the big winner of the next 10 years or if they’ll simply leave a big legacy of giving a good push to everybody else. But when everybody else ups their technology as well, suddenly it’s harder for Altruists to differentiate.
Michael: Even in the past few months, Altruist debuted at our FinTech competition in September and their big anchor was we have built this new modern technology and our costs to run a custody platform are so much cheaper than everybody else’s. We’re unique in the marketplace that no other RIA custodian offers will be an entirely commission free platform with no trading execution costs for stocks or ETFs. And that was their big thing because they’ve saved all this cost and technology by building a modern platform and their market differentiator lasted less than three weeks before interactive brokers did the news and then Schwab followed, and then TDA followed, then E*Trade followed and then Fidelity followed. And here we are with this zero commission world.
Michael: Already we see it took three weeks for one of Altruist’s key differentiators to get undermined in a hyper competitive marketplace and take yet another reason, a way as to why as an advisor would go through the pain of switching platforms even for something that may be better in a lot of processes. Is the pain of the switching worth what I really get on the other end and a platform that I don’t pay for right now and heck now all my trades are free?
Craig: Yeah. And you don’t want to be the low-cost provider. That’s not a way to build a business because there’s always someone who’ll undercut you.
Michael: Correct. Correct. The only thing harder than being a low-cost provider is being a startup low cost provider. People that actually have economies of scale can just decide, I think I’m going to give that away for free as well until my startup competitors go away. I think the estimate was Schwab’s going to lose something like $300-400 million in trading commissions when they decide to quash it down to zero, manageable with their billions of dollars of revenue. But they evaporated $300 million of revenue just to maintain competitive pressures against others. So it’s hard even as a well-funded startup to compete against someone that’s willing to eat $300 million of revenue just to make sure you don’t have a price advantage because they’ve already got trillions of dollars of scale to do so.
Craig: Exactly. Yeah. We all know the switching pain that is involved with changing custodians, so what do you see as the top three reasons why advisors would switch custodians if a new one were to start up?
Michael: Oh man, why do we switch custodians? Well, for some legacy platforms there actually still is a cost piece. When I look at a lot of why I see advisors come out of, frankly, a certain subset of broker dealers and into the RIA community, sometimes it is driven around, my broker dealer actually sells a lot of these trading costs. The RIA custodial community is cheaper, and my existing platform only has one set of technology vendors that are not even necessarily best in class and they have no ability to quickly iterate out of it. These custodial platforms have a wider range of more modern technology.
Michael: I think even as some of the RIA custodial tech has lagged a little, what’s capable in the marketplace is both companies like robo advisors and Altruists have shown, there are chunks of the BD community. They’re still lagging the RIA community enough that it’s helping to drive that change. And so I do see a level of technology as driving a switch. I think there are opportunities for custodians to go after pockets of advisors that do a particular thing. Folio gained a lot of activity for a while as one of the only ones that was allowing fractional shares. Trust Company of America had a lot of growth a few years ago by getting really good at model management at scale for Tam platforms that then built on TCA, before E-Trade acquired them. You can kind of niche your way around, and ultimately I think there was an opportunity for disruption, the custodial space for someone that wants to actually become a fee only custodian for feelingly advisors.
Michael: And to me what a feeling custodian means is a custodian that doesn’t make all of its money off back end commissions, which is the revenue sharing payments, the distribution deals, the payments for order flow, the scrapes off the money markets. It would be a custodian that comes to market that says, Look, we’re just going to charge you an upfront fee like all of you RIAs charge for your clients, some number of basis points and that you could build right into your fee, and we’re going to give you true best execution cause we’re not taking any money for order flow. We have no interest to do anything but give you best execution and we’re going to give you the highest yielding money marketplace in the marketplace because we don’t actually make any money off it since you’re paying us a fee. So I don’t have to make money on the back end and we’ll give you a completely open platform for every single fund company, even those pesky ones like Vanguard and DFA that don’t want to pay rev shares because we don’t take any rev shares because we’re a fee only platform.
Michael: There is kind of a strange irony that the fee only movement in particular has grown its entire business on the back of a commission-based platform, and it creates a bunch of misalignments. A lot of the RIA community today makes itself look good by sticking it to their custodians. Oh, you make all that money in cash. I’m going to program my rebalancing software to never leave any money in cash. Oh, you make money off order flow. I’m going to hire a trader that actually does the execution directly to make sure that you’re not making any money off of that. We use the tools and technology at our disposal to dismantle our RIA custodians business model because it makes us look good in front of our clients when we saved them all of these costs.
Michael: If a custodial platform wants to realign itself to use a fee only business model that’s aligned to the fee only advisors that they’re working with, I think there’s actually a big opportunity for that in the marketplace because you can now compete with better money markets, better trade execution, more capable tools and technology for whatever trades you want because you’re not making money off of a wider shelf of solutions that’s available because you don’t have to take money off the back end and do all of those negotiation and distribution deals making lower costs funds available on your platform. Now you can openly take the absolute lowest cost share class of everything that’s out there. You can even get fund companies to make new low cost share classes that would only apply on your fee only platform where they strip out the 12b-1s in the sub-TA fees and the rest because you’re not taking them because you’re charging the advisors in a fee only model.
Michael: I’m not saying this specifically to do a fee only versus commission debate, that’s a discussion for another day. There is a very large and growing stakeholder group of fee only advisors out there. And right now, they are in a battle with every single custodial platform to game the custodians commission system for the benefit of their clients because that’s how you look good as a fee only advisor. And I think there’s a whole opportunity for real growth with a competing new custodian to actually run the fee only custody model for fee only advisors.
Craig: Yeah, I would agree with you 100%. And we’re out of time. I really appreciate you spending this, almost an hour with me on, on this. And let me give you a wrap up here. I’m going to do a wrap up question for you. Let me know how I’ve done. So you can find a Michael Kitces at Kitces.com, that’s Kitces.com. You can also go to advicepay.com for the advisor billing software business he runs and you can see Michael at Schwab Impact on November 4th and November 6th, where he will be speaking.
Craig: You’re the sixth. Jeffrey Levine is the fourth, so yeah.
Michael: Yes, yes. Jeff Levine from our platform is on the fourth. I’m on the sixth doing a, kind of a fireside chat, a conversation around a lot of these ongoing issues and future of the advisor industry with moderated by Fred Gabriel who runs Investment News.
Craig: Awesome. Unfortunately I can’t be there, but I know a lot of advisors will be there. They’ll be very interested to hear what you have to say as we all are. And thanks so much for your time. This was great.
Michael: My pleasure. Thank you for having me on.
Craig: You are welcome Michael, talk to you soon. Take care.