The fiduciary standard is an important part of every advisor’s practice, regardless of what the final draft of the Department of Labor’s proposed regulation states, or when it goes into effect. Today, investors are expecting an ever-increasing level of service from their financial advisors; they expect transparency, round-the-clock connectivity and responsiveness, and a strong understanding of the future of their wealth. But ironically, some of the digital technology solutions that advisors need to become better fiduciaries and properly serve their clients make it more expensive for them to conduct business — and more expensive for their clients to invest.
There are a number of software providers that offer digital turnkey asset management platforms (TAMPs) that carry out their promise to automate RIAs’ back offices. Yet some of them also eat into advisors’ fees by charging 10-15 basis points for the use of performance reporting tools and other portfolio management features available in their technology suites. Meanwhile, some digital advice solutions that help RIAs demonstrate more value for clients and prospects on the front end also charge advisors 10-15 basis points for the use of various investment management tools, including model portfolios.
In addition, some digital TAMPs that enable advisors to invest client assets in portfolios offered by third-party managers charge additional fees on top of the funds’ expenses, hurting clients who could otherwise invest in the same portfolios at cost.
The benefit of digital TAMPs is that they offer a scalable solution for effectively servicing more clients, including small account holders, without having to hire more personnel. Among other advantages, they can also help advisors obtain a holistic picture of every client’s wealth, and securely document all client communication so that advisors can validate all decisions as being in every client’s best interest. Both of these capabilities are crucial for enabling advisors to provide a superior level of service for their clients, and become better fiduciaries.
While the cost of investing has been falling, software providers have actually been driving up costs under the smokescreen of technology. TAMPs that pile on additional expenses are forcing independent advisors to make an unacceptable trade-off. They can either:
- Earn less money, or
- Increase the cost of investing for their clients.
Under the guise of practice-critical technology, these providers are actually making it more difficult for advisors to compete with fund companies, while requiring advisors and investors to incur unnecessary costs.
This is a big reason why wealth management lags behind other industries in technology adoption. According to PwC’s most recent annual survey of the asset and wealth management industry, 66 percent of asset and wealth management firm CEOs consider the speed of technological change to be among their most pressing sector concerns, and 64 percent cited changing customer behavior, which digital solutions can help advisors address.
But despite the concern over technology’s impact on their industry, Boston Consulting Group found that, while 75 percent of wealth managers would like more interactive multichannel offerings, only 25 percent of them provide customized advice online.
What Advisors Can Do
Advisors have an opportunity to deliver the kind of service and experience clients have grown to expect from their service providers. The key is to find a technology solution that doesn’t force advisors to make the objectionable trade-off associated with some digital offerings, which prevents them from adopting the solutions they need.
A deeper understanding of software providers’ business models, including their fee structures, can help advisors cut through marketing slogans to identify which prospective solutions would be too expensive for their practices and clients over the long term, and which wouldn’t.
Advisors should also ensure that their current business model aligns with a potential vendor’s technology solution during the due diligence process. Some software solutions are designed so that advisors are required to custody assets with one or more custodians with which they aren’t currently engaged. In this scenario, even if the TAMP adds value to an advisor’s business, and the software provider doesn’t eat into the advisor’s fees or charge investors more to invest, managing additional custodial relationships can be a significant disruption to the advisor’s business.
When armed with the above insight, advisors can find digital technology solutions that optimize their practices, strengthen client relationships and empower them to uphold their fiduciary responsibilities—without cutting into their fees or forcing them to make unacceptable trade-offs that can jeopardize the investment goals of their clients. As for the technology providers, they should focus on contributing to the success and growth of the investment and advisory industry, not just profiting off of these business owners and their clientele.
David Lyon is CEO and Founder of Oranj, a Chicago-based provider of digital advice solutions for financial advisors.