“A person who never made a mistake never tried anything new.”
— Albert Einstein
Can there ever be too much of a good thing?
The wealthtech landscape has seen steady growth over the past six years since the Kitces\Ezra Group Advisortech Map was launched. The first version had 80 applications across 20 categories.
Today, there are over 400 applications in 40 categories with more being added each month!
In the beginning, I was always surprised when a new product launched in a crowded category like CRM, financial planning or portfolio management. How can they expect to gain traction with so many competitors in our industry?
Yet, no matter how many applications in a category, there always seems to be room for one more!
Many products are the brainchild of an advisor who isn’t satisfied with the existing selection of software and decides to build their dream app. Others take more of the traditional startup route with a pair of founders, seed funding and a plan to disrupt the industry.
The problem is that there are a finite number of financial advisors (a little over 330,000 according to the Bureau of Labor Statistics) with finite budgets who are already inundated with software solutions. Most new products launched in our space might collect a few hundred paying clients but then fizzle out when they can’t breakthrough beyond the bleeding edge.
I wrote an article about this called 50 Portfolio Management Systems Can’t All Survive, which offered a brief history of this category and the early players then estimated the size of the market for portfolio management software. Since every RIA, broker-dealer and other advisory firm needs a portfolio management platform, the market is robust. But it is certainly is not enough to support fifty products!
Like a game of musical chairs, the vendors go round and round and no one wants to be the last one left without a chair. Except the chairs are wealth management firms and the loser runs out of money and is forced to either sell to a larger competitor for peanuts, pivot to another product category or shut down the company entirely and take the loss.
Yet more portfolio management products are launched every year. How is this possible? Can’t these people read?
There always seems to be room for one more application, even in categories that are more crowded than a Tokyo subway car. I believe this happens for one of three reasons:
- Advances in technology enables startups to build new programs that are significantly better than the legacy systems. Market leaders build their dominant positions over many years and as they grow, their technology falls behind. Few firms have the money, resources and time to commit to redesigning their core platforms, so they become loaded with tech debt and a window opens for smaller, nimbler competitors.
- Lots of advisors have what they think are great ideas for new software. Combine this with programming becoming easier and cheaper over time as new development tools are released and software as a service makes advanced capabilities available with simple API calls. These advisors can build their own solutions relatively cheaply and then offer them out to the general market. Applications like Holistiplan, Pulse360 and Asset-Map were all created by financial advisors who saw a gap in the market.
- New companies from outside the industry get funding for ideas that don’t actually have a chance to succeed. We hear these stories all the time where founders think they’re going to disrupt things with solutions that do not have product market fit. Then when the market drops, these companies feel the pressure and either sell out to a competitor, pivot to another bad idea or run out of cash and close up shop.
Even with 400 applications on the Kitces\Ezra Group Advisortech Map we’re still seeing 4-5 new applications added each month. Although this is still far less than other industries which can have thousands of programs available.
New products with unusual combinations of features are resulting in the creation of new categories like Advice Engagement. This category started out as a catch-all group but has expanded as more applications have appeared with functionality that tries to enhance the advisor-client relationship. (See Ep. 169: Why Advice Engagement is the Most Important Category with Adam Holt, Asset-Map)
For every acquisition of a winning application, like YieldX getting snapped up by FNZ, there’s a me-too product shutting down like robo-advisor TradingFront which quietly closed last month after their introducing broker-dealer was shut down.
In order for an industry to see enough innovation, there needs to be a constant influx of new ideas and a constant outflow of companies successfully exiting as well as failing. The wealth management industry hasn’t seen enough failures as many companies are able to hang on with a minimal number of clients or enough funding to keep them on life support.
Will this market downturn continue long enough to wash out enough of the weaker companies or do they survive long enough to see the other side? We’ll let you know our opinion as the trends appear and which products are pushing the envelope of innovation.
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