The Shift To Advice-Based Business Models Means Advisor-Facing Risk And Financial Planning Tech Platforms Should Charge Firms Based On Households Served
In recent years, no single trend has defined the industry more than the shift from selling products to advice-based business models. Among other things, this has meant that when client portfolios grow, so do advisor and firm revenues, resulting in a better alignment of interests between all stakeholders.
At its core, it highlights how our economic system is supposed to work, with both a customer and a business benefiting from the exchange of a good or service. The problem is that a similar dynamic doesn’t exist across other portions of financial services – even as many third-party vendors always throw around words like “partnership” and “team” in promotional materials.
Consider the pricing models of advisor-facing risk and financial planning tech platforms. Most of them are based on the number of users. In other words, if a firm has 12 advisors, each must have their own license.
Depending on the platform, that could be $4,000 to $7,000 per month or $48,000 to $84,000 per year. Then, you have to consider annual price increases, which can be as high as 3% to 7%.
Over time, it’s easy to see how a structure like that could eat into margins, preventing firms from being able to reach their potential. That’s why a better approach is to charge firms based on how many households they serve.
The per-unit costs are lower, providing a quicker path toward growth. More than that, though, it’s a signal from the provider that they care about the success of their customers because when advisors do better by adding more households, their business will benefit.
Small Firm, Big Growth Aspirations
Think about a small firm with about five advisors. Let’s say the assets under management are relatively low now, but the team’s leadership is young, entrepreneurial and energetic. Presumably, the future is bright.
Like anyone else, they need a risk tolerance, investment analysis and financial planning platform. But if the provider charges per user, that presents a bit of a Catch-22.
On the one hand, it could try to supercharge growth by adding headcount. In that case, they’d get hit with tens of thousands of dollars in new platform fees – which, of course, are on top of the other costs associated with onboarding new advisors.
On the other, they could opt against expanding and attempt to do more with less. While that would save some money in the short term, could they really accomplish what they want to without the added scale? Perhaps, but it would likely take them much longer.
These aren’t choices firms like that should have to make.
Large Firm, Fewer Advisors
The per-user pricing structure isn’t just an issue for small yet budding firms with ambitious aspirations. It’s also a consideration for practices with a small number of advisors who serve a select number of households, such as family offices.
Firms like that can have four advisors and as few as 20 households. Even so, under most pricing models, they’d still need a license for each advisor. Some could argue that with billions of assets under management, a family office likely doesn’t have to sweat additional costs like others in the industry.
And while everything is relative, that’s not the point. The critical question is whether that pricing model is treating the customer fairly. Their own success shouldn’t work against them.
Not Just Advisors
Another thing to remember is that advisors are far from the only professionals within a firm who need access. Investment teams, support analysts, compliance officers and admins need to use risk and financial planning tools as well.
Granted, those access charges could be less onerous. But they are nonetheless fees, and the tactic does nothing to further a firm’s growth. (In fact, it does the opposite).
Ultimately, most advisors will tell you that their clients don’t mind paying fees as long as they get a high-quality service experience in return. Similarly, wealth management firms know that fees come with the territory.
The challenge, therefore, for tech platforms – or, frankly, for any business – is to make sure they are fair and the good or service is valuable to the customer. When pricing is not aligned with a firm’s interests and goals, creating that type of dynamic is difficult.
Akhil Lodha is the CEO of StratiFi Technologies, a financial technology platform for wealth management enterprises and their financial advisors.