In the span of barely 10 years, companies like Uber, Airbnb, Facebook and Alibaba have experienced explosive growth, far surpassing the growth rate of their respective industries — despite not actually producing anything.

Yet that’s the whole point. They are platform businesses, and their role in facilitating a marketplace between consumers and producers is the primary form of value creation, not the production of goods or services themselves. These platform businesses have been out-competing or outright disrupting their respective industries, raising the question of whether — or when — the platform model will come to financial services as well.

The financial services industry, though, is already filled with platform businesses. Arguably, stock market exchanges are among the oldest and original types of platforms to connect buyers and sellers. And custodians and broker-dealers constitute a form of platform business as well, connecting advisers and the asset managers who want to reach them.

Envestnet is quite possibly an even purer form of platform business, avoiding the hassles of being the custodian or doing the clearing, and instead just serving as the technology that facilitates matchmaking between advisers and asset managers.

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Digital wealth rivalries intensify
Every firm's focus is on capturing a share of the predicted $7 trillion market by 2020.

Still, this means the door remains open for an actual adviser matchmaking platform: one that connects consumers directly to advisers themselves. Prior attempts at this model have largely failed, likely due to most advisers being such generalists, which makes matching them effectively with consumers difficult. A successful platform would need to focus not on pairing consumers with advisers, but on helping consumers find advisers who can answer their particular questions. This in turn would force advisers to actually choose a niche specialization by which they can be matched. Consequently, the real platform opportunity of the future is not an adviser platform, but a financial advice platform.

RISE OF THE PLATFORM
For most of history, the traditional business model has been some form of pipeline business: one where the consumer buys a product or service that is delivered by the business in a series of linear steps from one end of the pipeline to the other. With a relatively simple product or service, the consumer may buy directly from the original producer. In more complex businesses, the pipeline may be elongated, with one company designing the product, the next manufacturing it and another distributing it for sale, and each business adds some value — and earns its keep — along the chain.

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Platform businesses can grow and scale far more rapidly.

In the past decade, though, we’ve witnessed the emergence of an entirely new model: the platform business. The key distinction is that while pipeline business models are limited to how quickly producers can create a good or service and push it through the pipeline, the platform business uses technology to connect consumers and producers directly, taking a small slice of the transaction. The key distinction: By being the connector of other buyers and sellers without being in the business of buying and selling directly, platform businesses can grow and scale far more rapidly than was otherwise possible with any past business model.

Thus, in the span of barely 10 years, some of the world’s largest companies have sprouted seemingly out of nowhere, dominating industries whose incumbents have been around for decades, despite the upstarts not actually producing any goods or services. The key driver that makes the platforms so extraordinary: network effects, or the phenomenon that the more people use the platform, the more desirable of a marketplace it is for other people to use.

Which raises the question: What industries will be impacted next? And is it only a matter of time before the platform business model consumes the financial services industry, too?

Exploring these questions and more is a new book, “Platform Revolution,” by Sangeet Choudary, Marshall Van Alstyne and Geoffrey Parker. In what will likely become a seminal work on the subject, the authors explore everything from what a platform business really is; why and how it’s so different — and why it grows so much more rapidly than pipeline business models; what conditions are necessary to stoke the rise of a platform business in various industries; and how entrepreneurs can go about trying to create and build one, which can be astonishingly lucrative when successful, but significantly more complex, making it far harder to execute successfully in the first place.

FINANCIAL SERVICE = PLATFORM BUSINESS?
From the perspective of bringing together buyers and sellers in a central marketplace, the financial services industry is arguably the original platform business. After all, matching buyers and sellers is exactly what the stock market, or more specifically, the stock exchanges, were established to do. In this context, most of the financial services industry is simply a collection of the ancillary businesses that support the stock exchange platform business. Apple and Facebook have app makers; the stock market has investment banks and broker-dealers.

Notwithstanding the fact that the stock market is one of the oldest and largest platform businesses, though, there are other platform businesses within the industry that help facilitate interactions (i.e., transactions) between producers and consumers as well.

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The real platform opportunity of the future is not an adviser platform, but a financial advice platform.

For instance, custodians and independent broker-dealers serve as a form of platform, facilitating interactions between advisers and their suite of available products. While consumers are the ultimate end-buyers of those financial services products, in this context the custodian or broker-dealer platform is the intermediary between the adviser and the product manufacturer themselves. Thus, just as Upwork connects businesses to freelancers and provides a platform to help facilitate those transactions and the associated workflows, so, too, do custodians and broker-dealers offer a suite of technology tools (e.g., trading and rebalancing and portfolio accounting software) to help facilitate the transactions that advisers engage in via their platforms.

Perhaps an even better example of a platform business serving advisers would be Envestnet, which, similar to broker-dealers and custodians, facilitates advisers’ connections with asset managers for various types of investment solutions. What’s notable about Envestnet from the platform perspective, though, is that it doesn’t actually serve as a broker-dealer or custodian at all; in fact, it works with those companies as a technology layer on top, using its technology to facilitate connections between advisers and third-party investment managers.

The end result: Envestnet has $880 billion of platform assets, of which it manages barely 11%. The remaining 89% is all under advisement and licensing fees for being the platform that connects advisers to other investment management solutions. And Envestnet’s ongoing technology acquisitions, from Tamarac to FinanceLogix and then Yodlee, have all helped to make it into an ever-larger platform, with a growing suite of technology tools to help facilitate more platform interactions.

Notably, though, it’s not the mere presence of technology that establishes a platform, but its ability to perform a matchmaking process. Pure adviser technology platforms — whether planning software platforms like eMoney Advisor, CRM-based platforms like Salesforce Financial Services Cloud or the new FinLife Partners, or portfolio-accounting and investment based platforms like Orion Advisor Services or Morningstar’s Advisor Workstation — may help make advisers more productive, but their ability to add value is contingent on the effectiveness of the adviser’s pipeline business. They cannot naturally scale the way pure platforms can, as technology to augment advisers is still ultimately constrained by the ability of the advisers to grow their own businesses.

A FUTURE IN PLATFORMS?
While custodians, broker-dealers and especially companies like Envestnet function as a form of platform business between advisers and the financial services product manufacturers trying to reach them and their clients, they are not actually platforms that facilitate consumers finding an adviser, where advice itself is the value interaction. But could there ever be an actual advice platform business that matches advisers and consumers, akin to how Uber matches drivers and riders?


(Bloomberg News)
(Bloomberg News)

Some have actually tried to build such a platform. The closest representation of the model was MyFinancialAdvice, an initiative that begin in the early 2000s but ultimately shut down a few years ago after failing to get sufficient traction with consumers. Another example still in practice is Paladin Registry, which also provides a matchmaking service between consumers and previously vetted advisers. And several membership associations and adviser networks provide their own form of mini-platform for consumers, including the NAPFA Find An Advisor tool, the CFP Board’s Find a CFP Professional site, and the find-an-adviser capabilities of the Garrett Planning Network and my own XY Planning Network.

Some might suggest that the various robo-adviser solutions are also functioning as platforms, but in reality their managed-accounts solution is far closer to a traditional pipeline business than a platform model. Companies like Betterment and Wealthfront — and while it was still independently owned, FutureAdvisor — ultimately construct their own portfolios, and what they sell to consumers is their automated investment portfolio construction services, produced by the robo-adviser and directly delivered by the robo-adviser.

In turn, this means that robo-advisers must ultimately still market to consumers like every other pipeline business trying to distribute its products or services to the public. There are no prospective network effects; while a larger customer base can mean some economies of scale, and potential referrals, the robo-adviser platform value interaction itself does not become more valuable with more users. Whereas for Uber, more riders means more demand for drivers, and more drivers means faster response times for riders — thereby increasing the value of the platform in a network-effect virtuous circle.

On the other hand, there are a few technology firms that have at least tried to initiate a bona fide form of platform business for at least some aspects of investment management services. Motif is arguably a form of platform business after it pivoted early on from designing its own motifs to allowing others to create them — which means the platform now connects Motif designers to investors who want to buy those motifs, in a relationship that can at least potentially exhibit network-effect benefits as more investors create demand for more motifs, and more motif demand creates more income potential for motif creators, in a virtuous circle.

Similarly, Wealthfront’s predecessor business model KaChing also operated as a platform that connected consumers to others who managed investments so they could mirror the trades themselves — as a kind of rough version of Envestnet, but for investment managers going directly to consumers, rather than to advisers — though the company ultimately pivoted away after failing to attract substantial assets to the platform.

Again, though, even these robo-adviser solutions ultimately are, or at least were, still trying to build platforms to connect consumers with investment managers where the value interaction was portfolio management and investment selection, not more holistic financial advice, and certainly not a matchmaking service to connect to advisers themselves.

CAN PLATFORMS WORK?
Given the potential for a matchmaking platform to connect consumers with advisers, the question arises as to why such a platform hasn’t taken off already.

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The question arises as to why such a platform hasn’t taken off already.

Prior adviser matchmaking platforms have seemed to fail because they couldn’t get consumer traction, in a world where client acquisition costs are already a significant inhibitor to expanding the reach of financial advice. Notably, this also implies that there was a failure for any network effects to help the platform gain traction, which can either enhance the value interactions on the platform — giving the platform more revenue to market — and/or bring down the acquisition costs as the increasing value and usability of the platform spreads by word of mouth.

In practice, though, an added difficulty for most adviser matchmaking platforms is the difficulty of matching a consumer to an undifferentiated, generalist adviser. The lack of niche or specialization for most advisers means there’s no useful criterion to match the adviser to the consumer. And the relatively small number of clients per adviser, even for an established adviser, means it’s virtually impossible to reach a critical mass of adviser ratings/reviews.

The end result? Most matchmaking sites match consumers to advisers based on location, even though an adviser’s ZIP code has no practical relationship to whether the adviser can effectively solve the consumer’s problem.

The few matchmaking sites that tend to do best are the ones that have some kind of differentiating criterion that makes the adviser eligible to be on the platform in the first place. For example, NAPFA only matches consumers to fee-only advisers; the CFP Board only matches to CFP professionals; the Garrett Planning Network provides matches for the middle class looking for hourly advice; and the XY Planning Network helps Gen X and Gen Y consumers find advisers who work for monthly fees, with no asset minimums.

Arguably, though, perhaps the biggest failure of prior adviser platform attempts was that they tried to match consumers to an adviser, instead of matching consumers to the advice they sought. Most consumers don’t wake up in the middle of the night saying, “I need a comprehensive financial plan,” or “I’ve got to find a financial planner.” Instead, they wake up sweating a particular financial question, whether it’s “Will I be able to afford to send my kid(s) to college?”, “Am I making the right decision about starting Social Security now?” or “Should I refinance my student loan debt?”

In this context, the key value interaction on an advice platform would not be helping consumers locate advisers, per se, but helping them find advisers who can answer their pressing financial questions.

This also helps explain why adviser review sites have also failed to gain traction. Because consumers aren’t looking for advisers — or for their ratings, geographic locations or their undifferentiated “we specialize in everything” pitches — they’re looking for answers to financial questions that might be provided by a particular adviser.

In turn, this implies what an advice platform must do well: match consumers with a particular question to the specific adviser who has the expertise to answer that question.

This is, of course, exactly how most other advice platforms operate. While advisers almost always start by offering “comprehensive financial planning/advice” — even if that makes it harder for consumers to tell us apart — sites like RocketLawyer offer an “Ask a Lawyer” service (not a “Find a Lawyer” solution), and while ZocDoc pairs consumers directly to doctors, the first question is, “What doctor specialty” is the consumer seeking? Matchmaking goes to solving the question/problem first, and introduces the professional service-provider later.

WHO WILL SUCCEED?
This dynamic of consumers searching for advice, not advisers, suggests that the true advice platform business of the future will most likely be a matchmaking platform between consumers and advisers with various specialties — i.e., niches — that make it easy to identify which adviser is the right match for the consumer’s question.

The key criterion for success will be bringing together a critical mass of advisers who all have specialties individually, but in the aggregate have enough breadth to answer a wide range of consumer questions. In turn, the breadth of answers can attract consumers to the platform to get their questions answered, and the greater demand for advice draws more adviser specialists to the platform, and gives them more opportunities to deliver that advice, in a virtuous circle.

Notably, in a world where the biggest challenge for specialized advisers is finding enough clients to fill their potential billable hours, a growing level of consumer demand for adviser specialists — facilitated by the platform itself — would make it easier for advisers to specialize, and even make it feasible for them to charge lower rates.

After all, while hourly planners commonly charge as much as $150-$200/hour, an adviser specialist who was assured of getting 1,000-plus billable hours could make $100,000 charging just half that hourly rate — and still have the other half of their year available to build the rest of their business. And such demand for adviser niches could itself help to persuade more advisers to adopt a niche.

Of course, with an ever-growing number of interactions between consumers seeking answers to financial questions, and advisers with niches making themselves available to answer them, the matchmaking function of the platform will become ever more important — especially given that consumers may not always even know what type of specialist/niche adviser they need, with the right expertise, at the right price point.

The platform challenge of designing effective matchmaking algorithms is not unique, though; as Choudary and his co-authors note in “Platform Revolution,” it’s the central challenge that all platforms face as they scale. From Uber and Airbnb to eBay and Match.com, the ability to facilitate appropriate matches is an essential platform role.

Fortunately, though, to the extent that the financial advice platform encourages and drives advisers toward niches, advisers will be easier to match, solving the fundamental problem that exists today: Advisers aren’t differentiated enough to be matched based on anything but their geographic location, which drives up the cost of client acquisition and that of financial advice.

In the long run, solving the matchmaking problem between consumers and advisers can not only make it easier for consumers to get their questions answered, but also make those answers less expensive, too.

So what do you think? Do you think an adviser — or financial advice — matchmaking platform would be viable? Would you participate on such a platform, if you had to actually pick a specialization? Would matching consumers based on their financial questions be more effective than trying to match advisers based on geographic location? Please share your thoughts in the comment section.

Michael Kitces

Michael Kitces

Michael Kitces, a Financial Planning contributing writer, is a partner and director of wealth management for Pinnacle Advisory Group in Columbia, Md., co-founder of the XY Planning Network and publisher of the planning blog Nerd’s Eye View.