This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
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Twenty years ago, the answer to this question was obvious. Wirehouses had better technology compared to any other firm or affiliation model.
The reason was math.
There is a cost involved with building and maintaining technology.
The users of the product ultimately absorb those costs. Whoever has more users has a broader base to spread development costs across.
Twenty years ago, an individual wirehouse firm had more users (advisors) for their technology than any standalone software provider. That scale enabled a wirehouse to invest in and build superior technology.
Fast forward to today. That scale advantage has reversed.
Building and using proprietary technology is a two-edged sword. Superior scale gives you a competitive advantage with your user base. But when you no longer have the scale advantage, and your addressable user base is limited due to the proprietary nature of your product (i.e., you don’t sell it to other firms/advisors), you risk losing your advantage.
That is what happened. The growth of the RIA model resulted in a larger pool of users (advisors) than any single wirehouse can count for themselves.
The user advantage wirehouses had is gone. And with zero chance of them abandoning their proprietary approach to technology, there is no reason to believe the trend will reverse anytime soon.
Also, consider the cultural approach to technology at wirehouses.
What recourse does a wirehouse advisor have if a broker is unsatisfied with their firm’s technology? Or if their firm refuses to add a requested new feature? Or the firm is not staying competitive in the marketplace?
Brokers can complain, but ultimately if their firm declines to make the investment needed or cannot create a better product, the broker’s only recourse is to leave the firm.
It might make sense for a broker to leave a wirehouse and move to a different affiliation model. But it is still a massive undertaking that should be pursued only for a worthwhile cause.
Wirehouses know brokers will endure a certain amount of “pain” before committing to such a transition process. (Spoiler: They also remember this when tweaking the comp plan each year.)
Compare this to how technology works in the RIA model.
The RIA typical approach to technology is to create a “technology stack” using third-party software. Such solutions include CRM, financial planning, portfolio management, risk tools, etc.
The fintech ecosystem now counts hundreds of solution providers. Within each category type (e.g., CRM), there are multiple solutions from which to choose.
Put differently, RIA advisors have choice.
While the wirehouse broker has the sole choice of their firm-provided proprietary technology, the RIA advisor has the flexibility to pick whatever solutions in the marketplace they want. And equally important, they have the ability to change providers as needed.
Each software provider must not only deliver a product worthy of winning an advisor’s business, but they must continuously work to keep their advisor clients satisfied to retain their business. The switching costs to change technology for an advisor in the RIA model is a far lower hurdle than the wirehouse broker whose only recourse is to fully transition away from their firm.
Which approach is more culturally aligned with keeping advisors satisfied?
I am not attacking the integrity or competence of the many hardworking and talented people working in wirehouse firms' technology departments.
It is not a “people” problem; it is a “structural” problem.
Wirehouses no longer have a user advantage. When they did, and their technology was superior, their “take it or leave it” approach to providing technology to their brokers was easier to justify. That is no longer the case.
Perhaps in another 20 years, something will cause the winds to shift back in the wirehouses’ favor. But for the foreseeable future, the RIA model has an undisputed advantage.
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development, to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.
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