The last decade has seen an explosion of fintech and wealthtech companies, to the point where it is difficult to keep track of them all. One of the most popular graphics currently making the rounds on the conference circuit is the Michael Kitces
fintech landscape. It's impressive in its completeness, and usually accompanies stories about the exponential increase in technology options for advisers. The general sentiment is that this is a good thing, and the more innovation in our space, the better.
It sounds like fintech heresy, but advisers are oversaturated with options in a way that hurts their businesses.
My contrarian view is twofold: 1) this dynamic is actually a bad thing, and 2) we're about to see a contraction in the number of companies on that map. I would bet that when Mr. Kitces updates his graphic in two years, it will look very different and much more slimmed down.
Choice is bad
When it comes to adviser tech, more isn't always better. Too much choice forces advisers to become experts in something that is non-core to their success as a business owner.
Here are some big-picture stats to prove my point. The median adviser manages $99 million in assets and earns $694,000 in annual revenue, according to the latest
PriceMetrix study on wealth management. This puts the adviser squarely in the realm of U.S. small businesses.
At this level, successful advisers are pouring their energy into all of the things associated with being a good steward of their clients' financial lives, not moonlighting as chief technology officers.
It's crazy to expect an adviser at this stage to piece together a holistic tech solution, from hundreds of potential component parts, that perfectly maps to their unique planning process and client experience. In the event that an adviser does manage to identify exactly what they need, they then face the challenge of integration. Having five systems that don't talk to each other is a bigger time suck than having no systems at all.
This is where the crowded fintech landscape doesn't do itself any favors. Advisers need a
full-stack solution, not a broad swath of choices.
There's a Silicon Valley saying: "That's a feature, masquerading as a product, masquerading as a company." Many wealthtech companies are guilty of falling into that paradigm, and advisers suffer as a result.
Signs wealthtech market is stagnating
While the number of adviser tech choices has ballooned, enthusiasm from venture capital backers has not followed suit. The
latest data from CB Insights tally year-to-date wealthtech funding at about $1.9 billion. That tracks with the same time period in 2018, despite a significant drop in Q2 of this year.
While consistent year-over-year funding levels sound like a healthy environment, consider these two points: That stat includes a number of direct-to-consumer offerings like
Robinhood, which raised $323 million in July — accounting for almost half of Q3's wealthtech funding by itself. Without these direct-to-consumer startups, the VC outlook for pure adviser tech paints a grim picture.
Secondly, VC funding in general ballooned in 2019 to an all-time high of $220 billion to date; by the end of the year, it's poised to meet or exceed 2018's eye-watering $293 billion.
If "smart money" private investors (who, incidentally, likely have insider info from previous sector investments) were long on wealthtech, we'd expect to see money follow the trends of VC as a whole. The current state of the industry isn't working, and the majority of companies will not survive on their own.
Looking past the numbers, it's not a surprise that this segment is suffering. Not only do advisers face challenges when integrating their tech, distribution in this market is incredibly difficult, too.
Aside from custodians
— a de facto requirement to be in the advisory business — and a few outlier providers like Envestnet and Orion, most companies have a hard time selling their services to advisers. It makes sense if you take a step back to look at other industries.
The No. 1 type of VC-backed company that fails is one that sells into small businesses. It is a very, very hard nut to crack: each sale requires an enterprise-level sales process but each buyer acts like a unique consumer, without a sophisticated buying process.
The stage is set for massive consolidation, as companies seek to put together full-stack solutions with streamlined sales teams, full integrations and consistent pricing. When the dust clears, the solutions that remain will be good for advisers, except for one small wrinkle.
Great tech doesn't equal a great business
We built our technology at Facet to make our advisers' and clients' lives much easier, by streamlining processes and automating a lot of the nitty-gritty, low-value work that robs advisers of time they could put to better use. While we have a significant team of our own software developers, I'm most confident in the tech we use because it completely mirrors the planning process and client experience that we defined before one line of code was written.
In other words, the tech has to match the process, not the other way around. An off-the-shelf full-stack tech solution, no matter how advanced, won't help you if you're contorting your business to fit the product. Each adviser is unique, and has their own flavor of how they best help their clients. Fully-integrated software products are not unique, they are one-size-fits-all.
[More: 3 ways to improve adviser technology]
Don't despair
So I guess we're all moving back to spreadsheets and the occasional abacus, right? Not exactly. The market will need a provider that can help advisers with a fully integrated process and technology solution and that already has the distribution pipes built — not to mention the capital to fund an audacious, full-stack strategy.
Yep, you guessed it: the custodians. The best custodians have significant practice management and business consulting arms. The next logical step is for them to provide a tech stack as well. I'm looking at you, Fidelity/eMoney.
And now is a great time for them to start thinking about the future of their business models. Trading commissions are gone, and asset-based fees are likely to continue their decline. Why not put together a subscription-based tech offering that provides real value to their adviser clients, and shore up a new revenue line in the process? Seems like a win-win to me.
[More: Zero-fee trading was a warning shot. Asset management is next]
Anders Jones is co-founder and CEO of Facet Wealth.
