The Latest In Financial #AdvisorTech (September 2022)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Gathering data about a client’s current financial situation is a natural prerequisite to providing them with financial advice about how to make changes to improve their situation and better achieve their goals. Yet, the irony is that the “data-gathering” phase is actually one of the most challenging parts of the financial planning process. As, in practice, clients often aren’t organized enough to fill out the advisor’s “data-gathering forms” and share information about their current financial situation. For which the primary alternative is to simply ask clients to share all of their original financial documents – from account statements to tax returns – where the advisor then engages in their own time-consuming process to analyze those documents and extract the necessary information.

In recent years, though, a growing number of technology solutions have begun to better automate this data-gathering/intake process, from the rise of account aggregation to automatically populating financial values into financial planning software, to Holistiplan automatically scanning a client’s tax return to identify tax-planning opportunities, and FP Alpha similarly launching a solution to scan a client’s estate planning documents to identify potential estate planning issues. All built around the idea of expediting the otherwise time-consuming process of poring over a client’s financial documents to try to extract the relevant financial information.

And now, newcomer VRGL (that aims to help advisors ‘guide’ clients to better portfolios, named after Virgil, the Roman writer and guide in Dante’s Inferno) announced a $15M Series A capital round to fund its addition to automating data gathering, with a new solution that can scan a prospect’s account statements to automatically extract holdings and their values, along with cost basis information and/or gains and losses, and even fees that are being paid (to the extent they’re shown on the statement in the first place!). Which are then fed into VRGL’s investment analytics tools to provide further analysis of the client’s current investment positions (and how they might be improved upon by the advisor!) with respect to Performance, Risk, Diversification, Fees, and Taxes.

Similar to other tools that help to automate various components of gathering data and ‘reading’ clients’ financial documents, VRGL is positioned to greatly reduce the time it takes to pore over clients’ existing holdings to find opportunities to make investment recommendations that improve their financial situation. Though also similar to other data-gathering automation tools used by financial advisors, the endpoint may not necessarily be a faster process for crafting recommendations, but a richer flow of information that gives advisors an opportunity to go deeper in finding more/new/better investment ideas and improvements than they would have found on their own in limited time. In other words, if an advisor only had an hour or two to analyze a prospect’s holdings, instead of spending most of that time just trying to extract information from statements to understand their holdings, the advisor can spend most of that time going even further in researching better solutions to improve upon what the client currently has.

Ultimately, though, VRGL’s success will be dictated first and foremost by its ability to actually read effectively a very wide range of account statements from financial institutions that don’t always do the best job of making the information on their statements clear and understandable in the first place (to put it mildly!). From varying formats of how positions are stated, how gains and losses (and cost basis) are reported, to how fees (and other flows in and out of the account) are reported, creating a tool that can extract all the relevant information from any prospect’s statements, and report back the details accurately, is no small feat, and it remains to be seen whether advisors believe that VRGL’s execution can live up to its promise.

Nonetheless, with use cases from advisors gathering investment data with new clients, to creating a proposal for prospects, or even building a lead-generation tool that encourages visitors to upload PDFs of their statements to receive an ‘instant analysis’ of their own portfolios, VRGL’s solution seems well positioned to help advisors in a key domain of the prospecting process (particularly for the predominant AUM model), and it wouldn’t be surprising to see the tool eventually make the scanned/extracted information available via an API tool to export into other investment analytics tools as well. The only question is how effective will VRGL be at truly extracting all the information that advisors would want to glean from a prospect’s investment account statement?

The ‘standard’ formula for the profitability of an advisory firm is 40/35/25 – where 40% of revenue goes to “direct expenses” for advisors to service clients, 35% goes to the various “overhead” expenses that it takes to run an advisory firm, and 25% is the net profit margin that results. In the context of individual/solo advisors, this is often equated to a 65% “payout” rate – where the advisor running their own business earns the 40% of revenue to service their clients, plus the 25% of profits… reduced by their 35%-of-revenue in overhead expenses.

Notably, though, the 35%-of-revenue-in-overhead ratio does vary at least a bit from one advisory firm to the next. Larger firms often seek to ‘bulk up’ and grow (organically, or by acquisition) in order to achieve economies of scale that reduce their overhead expense ratio. While smaller firms – and especially solo advisors – often have lower overhead expenses because they don’t have or even need a full “staff” infrastructure, given the growing capabilities of technology to power highly efficient solo practices.

In between, though, there is a “dangerous middle” zone – which can span from $100M of AUM up to $2B+ – where advisory firms are too big to be lean, tech-efficient solo advisors and have to start hiring up more staff, but are too small to be “big” and gain any economies of scale as they’re still building out the staff and systems infrastructure it takes to grow the firm to the next stage. In the dangerous middle, margins can and often do decrease as overhead expenses rise.

In this context, it’s notable that this month, Farther announced a $15M Series A round of capital to build an RIA platform that seeks to help advisors work through this “dangerous middle” by providing them centralized staff resources and Farther’s own custom-built technology, and a “75% payout” that in theory should be almost all “take-home” compensation for the advisor who can leverage Farther’s resources to minimize any further overhead expenses of their own. Unlike most other ‘independent’ advisor platforms, though, Farther is structured as a W-2 employee model, where advisors are expected to fully plug into the Farther infrastructure (in order to gain the efficiencies that come from Farther’s centralized resources to achieve their 75% payout).

The buzz from the industry about Farther was its somewhat “eye-popping” valuation of $50M in enterprise value, for an advisory firm with “just” $2.5M of AUM… implying a valuation of as much as 20X revenue (assuming a ‘traditional’ 1% AUM fee), for a firm whose profitability will be greatly limited by the fact that it pays out 75% of its revenue ‘off the top’ to its advisors, and must still staff all of its advisor support and technology from ‘just’ the 25% that remains. Yet, in the end, all Farther’s valuation really implies is the sheer growth rate opportunity its investors see – after all, if Farther is able to quickly attract dozens or even hundreds of advisors, it can quickly grow to billions in AUM, for which its valuation might seem quite ‘reasonable’ by traditional advisor metrics.

Instead, the real question for Farther is simply whether it will be able to attract a material segment of advisors with its quasi-independent model that gives advisors some level of autonomy over their clients but is ultimately structured as an employee model where the advisors are IARs of Farther’s corporate RIA, and whether it’s “75% payout” structure is ultimately compelling. As, in the end, the reality is that high-income solo advisors can often drive margins of 80% – 90% for themselves by simply focusing on a small base of high-value clients (where a 75% payout isn’t compelling), and larger multi-advisor firms that are further along into the “dangerous middle” may not fit into Farther’s still very solo-advisor-centric offering (at least as currently marketed) and not be willing to let go of their existing staff to map onto Farther’s infrastructure instead. Which means, ironically, that Farther itself may struggle in a form of ‘dangerous middle’ where larger advisors netting less than 75% of revenue themselves don’t fit Farther’s model, and smaller advisors who want to stay solo can create better-than-75% take-home margins for themselves with existing technology and platforms.

From the broader industry perspective, though, the really notable aspect of Farther is simply that while it is building some of its own technology, Farther is arguably a “services” offering more than an actual “tech company” (or at best, is positioned as a “tech-enabled services” provider). For which the company was still able to receive a “tech-like” multiple and valuation in the hopes of being able to achieve “tech-like” growth trajectory by attracting advisors who want to affiliate with the services it provides. And so regardless of whether Farther in particular is the big winner, the broader question is whether “tech-enabled services” are going to become the new “tech” for financial advisors?

While most consumers could arguably benefit from financial planning at any particular point in time, in reality, most consumers don’t actually take action to seek out a financial planner until something “hurts” – when they hit a new moment of financial complexity, and/or a life transition, that makes them decide that now is the time to reach out and hire a financial advisor. As a result, “drip marketing” has long been a marketing tactic of financial advisors – providing a steady stream of content to prospects so that whenever the consumer does have their moment when it’s time to find a financial advisor, the advisor will be visible and ‘top-of-mind’.

Historically, drip marketing for advisors was done in the form of a quarterly newsletter, with various third-party services that would print and mail the advisor’s newsletters to a prospect list the advisor generated by collecting business cards at networking meetings. In recent decades, drip marketing has shifted heavily away from the physical to the digital, as quarterly (print) newsletters have become monthly (email) newsletters, but the core throughout has remained the same: providing a steady stream of content to prospects to keep the advisor top-of-mind. And the more relevant the content, the more likely prospects are to engage with it, and the greater the likelihood that the advisor will remain top-of-mind for future opportunities to convert from prospect to client.

Accordingly, over the past decade, a growing number of AdvisorTech solutions have emerged to try to help fill the content of those digital drip marketing strategies. In some cases, the goal was simply to provide a library of content to choose from (e.g., Financial Media Exchange), while others like Vestorly tried to be more effective at selecting and curating the most relevant content for advisors’ prospects (by looking at what prospects clicked on to determine other articles that might be relevant and of interest).

The caveat, though, is that ‘good’ drip marketing content only matters if advisors can figure out how to get prospects to go to their website and sign up for their email list (to be drip marketed to) in the first place… and in the end, if advisors want to convert prospects to become clients, at some point the advisor has to show up and demonstrate their own expertise with their own content (not ‘just’ have a solution that shares third-party content). As a result, advisors have often had lackluster results – which in Vestorly’s case, led to its CEO infamously stating that “Vestorly does not attempt nor need to ‘convert’ clients to succeed”… followed unsurprisingly by stalled growth and the ultimate departure of its founding CEO.

But now, the news is out that FMG Suite has acquired Vestorly, with an eye to incorporating its curation capabilities into FMG’s existing marketing systems for advisors… which, notably, includes a more robust offering that can generate new prospects for the advisor’s email list (with website design and LeadPilot for lead conversion), marketing automation tools to nurture the advisor’s email list, and “Done For You” services that allow advisors to more fully outsource their marketing needs for list-building and conversion.

From the FMG perspective, the Vestorly deal makes sense, as the core of Vestorly’s curation engine was always strong – the only issue for Vestorly was that “content curation” alone couldn’t create marketing success for advisors when it lived on an island, outside of the capabilities to increase how many prospects were signing up for the email list to be drip marketed to, and a more refined funnel (including advisor-created content that demonstrates expertise on top of third-party curated content) that could actually convert email-list prospects to become actual clients. While FMG may be able to leverage Vestorly’s content curation far more broadly across its advisor websites, email marketing automation, and social media sharing tools.

More broadly, though, what Vestorly’s challenges and ultimate exit to FMG really highlight is that, in the end, advisors will only buy (or keep paying for) marketing technology that drives real marketing success by attracting prospects and converting them to clients. As a result, providers have to either build the full suite of capabilities it takes to drive advisor marketing results… or look to merge themselves into platforms that can leverage their technology across the full breadth of capabilities that advisors need to be able to market themselves successfully.

When it comes to financial advisors, it’s surprisingly difficult for good technology startups to get noticed and gain traction. As the landscape of financial advisors themselves is remarkably bifurcated. On one end, there’s a very large base of tens of thousands of independent advisors, most of whom are composed of just one or a handful of advisors, which is very challenging to market to and sell one firm at a time. On the other end, are the larger enterprises – independent broker-dealers, and then wirehouses, insurance companies, and banks – who may have hundreds or even thousands of advisors in each enterprise (and a few hundred thousand in total!), but with extremely long sales cycles and arduous due-diligence requirements that startups may struggle to clear.

In other words, most AdvisorTech startups are usually caught between a rock and a hard place when it comes to their “go-to-market” efforts to launch a new solution. For which, in the end, most AdvisorTech firms decide not to take on the risk (and long and costly sales cycle) of pursuing enterprises, and instead try to build their user base one independent RIA at a time, in the hopes of using their initial traction with RIAs to raise additional capital to hire an enterprise sales team and pivot to larger broker-dealer enterprises in the future. Yet that still raises the question: how best to get seen efficiently amongst the highly fractured RIA community, especially when the most common gathering places for advisors – industry conferences – have an exhibit hall pricing model that’s built primarily for asset managers and not technology companies.

In recent years, an emerging alternative is a growing number of “AdvisorTech Competitions” and “Demo Stages” that offer AdvisorTech companies – and especially newer startups – an opportunity to be seen by advisors, either for free (for those who are selected as ‘winners’ of the competition), or at least at a greatly reduced price (for a smaller ‘kiosk’ and a chance for a brief demo to showcase their advisor software).

This month, two such AdvisorTech events announced their ‘finalists’: the new FutureProof conference and its “FinTechX Demo” stage (which will run on Tuesday, September 13^th, in Huntington Beach, CA), and XYPN LIVE and its long-standing “AdvisorTech Expo” (running on Monday, October 10^th, in Denver, CO).

The FutureProof FinTechX demos will feature a mixture of newer AdvisorTech startups like Entrustody (a new RIA custodial platform), Hubly (offering multi-platform workflows for advisors), Onramp Invest (providing data integrations for clients holding cryptoassets), Venn by Two Sigma (investment analytics), and VRGL (which scans client account statements to quickly generate an analysis and investment proposal), along with a number of existing AdvisorTech companies with new offerings, from Intelliflo’s RedBlack (trading and rebalancing) to Skience (with a new compliance oversight solution), Practifi (with a new data analytics solution) to Wealth Access (more unified client portal and investment reporting), and more.

In the case of XYPN LIVE’s AdvisorTech Expo, the focus is more directly on ‘newer’ companies (launched in the past 12 months, or with still less than $1M in revenue), and a particular focus on tools that support “Advice Engagement” (more deeply engaging prospects and clients into the advice process), and includes Lumiant (to better engage the less-engaged spouse in the financial planning process), Sora (for debt management), Income Lab (for retirement distribution planning), Econiq (to improve engagement in virtual meetings with clients), and Savology (for more engaging ‘simplified planning’ tools), along with Hubly and VRGL (that will also appear at FutureProof).

For advisors, the opportunity with events like FutureProof FinTechX and XYPN’s AdvisorTech Expo is to be able to efficiently scan a number of new advisor technology solutions all at once in quick succession (as such demo events typically feature relatively limited ‘demo’ time slots, one after another, making the process very efficient). Although such events are also increasingly attracting VC and PE firms that are trying to spot the next big deal opportunity as well.

In the end, though, arguably the biggest benefit is simply for AdvisorTech companies themselves, that get an opportunity to be “seen” at a relatively low (or entirely free) price point, giving them an opportunity in the highly fragmented RIA community to build the initial word of mouth it takes to get going. Which hopefully means that more advisor conferences will create similar opportunities in the future as well!?

One of the biggest ironies of financial advisor regulation is that Registered Investment Advisers (RIAs), with the highest (fiduciary) standard of care, have historically had no continuing education obligation to affirm that they’re even still competent to give advice. And the bar to obtain the requisite Series 65 license in the first place isn’t much higher, requiring only a relatively basic understanding of economic concepts and investment vehicles (and their risks) and the laws that will apply to you as an Investment Adviser Representative (IAR) of an RIA.

In recognition of this gap, back in November of 2020, the North American Securities Administrators Association (NASAA) passed a new Model Rule for states to begin implementing a new IAR Continuing Education (IAR CE) requirement. Which ultimately rolled out for 3 states in 2022 (Maryland, Mississippi, and Vermont), and is on track to go live in 9 more states in 2023 (and ostensibly more thereafter, but with Model Rules, each state must individually go through its applicable regulatory or legislative process to formally adopt the rule in their state).

The new IAR CE rule will require investment advisers to obtain 12 hours of CE each year, including 6 hours of “Products & Practice” and another 6 hours of “Ethics & Professional Responsibility”. Which IARs are obligated to obtain as long as they are registered in any state that has the IAR CE obligation, even if their home state has not yet implemented the requirement (i.e., if an advisor is based in California but has at least 5 clients in Maryland such that they must be registered in Maryland, then the California IAR is still required to obtain their 12 hours of IAR CE in 2022 under Maryland’s requirement even if California does not require IAR CE yet).

Consequently, the new IAR CE rule applies far more broadly than ‘just’ the RIAs based in the 3 states that have adopted it thus far, and many RIAs will have to manage a mixture of advisors who do have the IAR CE obligation, and others that don’t (based on the states in which each individual adviser is registered). In addition to the fact that many IARs must also manage overlapping CE obligations from other professional licenses and designations (e.g., CE for CFP certification or other designations, NAPFA CE for members of the association, ongoing CPE for those with a CPA license, etc.).

To help fill the void, this month RIA compliance software platform SmartRIA announced that it was rolling out an IAR CE offering in a partnership with Kitces.com, delivering Kitces’ (IAR and other designations) CE solution to SmartRIA users, with an integration that will pass advisors’ CE information from Kitces back to SmartRIA so Chief Compliance Officers can track the fulfillment of all of their advisors’ CE compliance obligations in one place.

From the individual advisor perspective, the new offering doesn’t necessarily bring anything that advisors couldn’t have already obtained separately from each organization. But at a firm level, as more and more RIAs become multi-advisor and Chief Compliance Officers have the obligation to ensure that all of their IARs are meeting their regulatory obligations – which now includes IAR CE – the ability to centrally oversee and manage IAR CE across the firm becomes a significant efficiency enhancement.

From the industry perspective, though, the SmartRIA-Kitces integration is a marker of a broader trend of the growing compliance obligations that increasingly multi-advisor RIAs must fulfill (and Chief Compliance Officer must oversee)… which is bullish for RIA compliance software platforms like SmartRIA (and RIA In A Box, and Red Oak Compliance, and Joot, etc.) that help to track the firm’s obligations and ensure they’ve been met (both with respect to IAR CE, and the full range of compliance obligations), and raises the question of whether RIA compliance software itself may increasingly become a new ‘hub’ to which other software vendors attach (akin to how RIA custodians and portfolio management software has been in the past!).

For the decade of the 2010s, the RIA custody business was dominated by the ‘Big 4’ of Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions, and a long tail of smaller niche custodians like SSG, TradePMR, Trust Company of America, and Folio Institutional (many of which were simply overlays on other existing custody and clearing platforms). The good news of this relative concentration of RIA custodians is that it allowed them to achieve enormous economies of scale… to the point that most RIAs simply experience RIA custody as a “free” service, where the tiny sliver of revenue that custodians make from client cash spreads, 12b-1 and sub-TA fees from mutual funds, payments for order flow, and the like, were able to cover the cost of the entire relationship. The bad news was that, as such large companies, innovation or even mere ‘technology evolution’ was excruciatingly slow… such that by the time robo-advisors showed up with the ability to allow consumers to digitally open an investment account via their smartphone, some RIA custodians were still executing the same process via fax machines.

Notably, though, many of the early robo-advisor platforms, including Wealthfront, Robinhood, Stash, and more, were themselves built as technology layers on top of Apex Clearing… which soon raised the question of whether Apex could become a competing RIA custodian as well. With the caveat that while it was very API-friendly to support digital account opening, it didn’t have the kind of RIA-friendly interface that advisors were accustomed to. Which led to a slew of Apex partnerships with “robo-advisor-for-advisors” platforms that were willing to build the advisor interface on top of Apex, including AdvisorEngine, RobustWealth, and Trizic, in the hopes that their growth would lead to Apex growth.

Except ultimately, most robo-advisor-for-advisors platforms were unable to gain traction, due largely to the fact that advisors, in the end, said they wanted better digital onboarding and a better client experience, but weren’t willing to pay robo-advisor fees to get it… expecting instead that onboarding should simply be part of what RIA custodial platforms already offer. And perhaps more importantly, most RIAs didn’t necessarily want to go through the trouble of re-papering client accounts to a new custodian just to get an incremental improvement in their onboarding process.

Nonetheless, this month Orion announced a new “Automated Account Opening”, building on top of their prior 2020 integration with Apex Clearing to digitize the account opening process, that aims to pair together Orion’s simplified Financial Planning workflows with digital account opening to make it easier for advisors to work with smaller clients who can mostly self-direct through the Orion financial-planning-plus-investments experience.

The caveat, though, is that using a digital “robo”-style tool to reach next-generation clients has never managed to gain traction through any iteration of robo-for-advisor digital tools, owing largely to the simple fact that few advisory firms have a sufficiently broad and scaled marketing ability to generate a material number of next-generation prospects in the first place. Not to mention that consumers who want a largely self-directed technology experience don’t necessarily want or need to hire an advisory firm in the first place, when there are already a number of robo-advisors (and ‘robo’ managed account solutions from direct-to-consumer brokerage platforms) they can engage with directly.

In addition, RIAs have still shown little willingness to re-paper client accounts to access such digital capabilities – as the workload to repaper all of an advisory firm’s existing accounts far outstrips any incremental efficiencies for onboarding new clients more digitally (especially when most RIAs are only adding new clients at a mid-single-digit growth rate). Nor is it even clear that advisors would be willing to add a new RIA custodian to more efficiently serve ‘small’ clients, given the additional staff training and processes that must be developed to be multi-custodial (which is only partially expedited by Orion’s multi-custodial capabilities). Especially since Schwab itself just released a major efficiency enhancement to its digital onboarding capabilities.

Arguably, the slow pace of RIA custodian innovation – with Schwab only ‘just’ refining its digital onboarding capabilities a full decade(!) after robo-advisors like Wealthfront and Betterment first went mainstream in 2012 – suggests a need for more competition to drive custodians to invest more aggressively to compete. Yet, at the same time, the ongoing challenges of Apex to gain traction through any of their partnerships – as so many robo-for-advisor solutions tied to Apex have gone by the wayside, and as Orion continues to make incremental improvements and then ‘re-announce’ the integration – suggests that in the end, perhaps digital onboarding isn’t really as big of a deal as the industry has made it out to be. Because, in the end, advisors still aren’t voting with their feet for better digital onboarding tools to serve smaller next-generation clients, and instead have continued to prioritize the depth of service and support from the larger, more established RIA custodians?

In the meantime, we’ve rolled out a beta version of our new AdvisorTech Directory, along with making updates to the latest version of our Financial AdvisorTech Solutions Map with several new companies (including highlights of the “Category Newcomers” in each area to highlight new FinTech innovation)!

Click Map For A Larger Version

So what do you think? Will VRGL’s automatic extraction of key information from a prospect’s investment statements help advisors to go deeper with investment proposals? Can Farther gain traction building with small-to-mid-sized RIAs who don’t want to deal with their own back-office infrastructure? Will Apex Clearing finally begin to gain traction with RIAs through their partnership with Orion? Let us know your thoughts by sharing in the comments below!

Disclosure: Michael Kitces is the co-founder of XYPN, which was mentioned in this article.