How the relationship between financial advisors and technology is changing everything

Rose kicked off the hour-long discussion by saying there is a lot of activity in the current retail wealth management space, but there are a few key trends that are particularly impactful as they relate to how advisors are constructing their tech stacks, and how they're using technology in their practices to run operations while providing a better client experience. 

Rose said the first of those trends is something Cerulli has been tracking for more than a decade: advisor affiliation and where advisors are positioned within the broader wealth management ecosystem. 

He said from 2012 to 2022, Cerulli has seen a significant increase in advisor-identified affiliation for both hybrid RIA and independent RIA structures, largely at the expense of wirehouse affiliation, retail bank affiliation and independent broker-dealer affiliation. 

This impacts the ways in which advisors source their technology stack, which has ramifications for the entire industry. 

"But there are also a couple interesting points I'd like to add to this. And the first is that when we ask advisors that are hybrid RIAs why they retain their BD affiliation … and stay in the hybrid channel as opposed to becoming just purely independent RIAS, the third most frequently cited reason for retaining a BD affiliation is the basically the access that they get to an institutional turnkey technology platform from their BD partners.

"The technology platform that's available to these hybrid RIAs really is one of the primary reasons we're seeing advisors stay in the hybrid RIA channel. And what we've seen over time is that, 10 years ago or so, I think advisors largely saw the hybrid RIA channel as a kind of a pitstop on the way to full independent RIA affiliation," he said. "It has shifted and increasingly become a final landing pad for advisors for a variety of reasons, not the least of which is the turnkey technology platform."

Rose said Cerulli is also seeing more advisors preferring to tuck in to existing independent practices over launching their own independent practice. When advisors were asked why, the most frequently identified reason is access to an existing turnkey tech platform. 

"So tech really is a key driving force behind this broader trend that we're seeing in terms of advisor affiliation decisions," Rose said.

Another key trend Rose has noticed that is influencing the way advisors leverage technology to deliver services to their clients is a slow and steady transition away from brokerage-based business and toward advisory business delivered under a fiduciary standard of care, particularly among broker-dealer advisors.

"We've seen a significant shift, almost a doubling of the share of assets among BD advisors, that are held in advisory accounts. And of course, this is a very different service delivery model where instead of having a transactional based relationship with a client, advisors are providing ongoing advisory relationships," he said.

According to Rose, advisors are providing financial planning services to an increasing range of their client base. In 2020, about 70% of advisory clients were receiving some form of financial planning services, and that is expected to increase to 78% in 2024. 

"Nothing changes overnight in this industry," Rose said. "But we're seeing a very consistent trend towards a broader range of ongoing advisory services, both in terms of investment management, as well as comprehensive financial planning."

In terms of how advisors are sourcing technology, Rose said there is a fairly pronounced difference in home office oriented sourcing of technology and practice level sourcing. 

He said the amount of control advisors have over the selection of their technology stack increases as they go independent, noting that more than half of captive broker-dealer advisors are required to use a turnkey technology platform that's provided to them by their broker-dealer.

On the opposite end of that spectrum, about half of independent RIA advisors are sourcing their technology entirely from third parties. 

"That has significant implications in particular for technology vendors, because it's creating more of a market opportunity for innovation and more of a market opportunity to get in front of advisors and sell technology directly to those smaller advisor practices, as opposed to trying to get into a very, very large global wealth management organization," Rose said.

By asking advisors what kind of tech they rely on and how they use it, Cerulli has segmented advisors into what they call technology user types, ranging from light users of technology to heavy users of technology. Rose said wirehouse advisors have the largest share of their advisors fall into the heavy user tier, and there are a number of things driving that.

"The first is that we see wirehouse advisors being the most productive advisors in the industry in terms of assets under management per advisor. And we also see that wirehouse advisor teams have the largest share of their practice operating in a team structure," Rose said. "What our research has shown is that those team structures provide a better kind of a better framework for specialization within the practice's staff and opportunity for expanding subject matter expertise, including the role of technology. 

"And so as practices expand in size … we're seeing greater adoption of technology within the practice."

On the flip side, Rose said retail bank and broker-dealer advisors have the lowest share of heavy technology users. 

"When we talk to retail bank advisors, one of their biggest frustrations with their firms is the technology that's available to them, and this is really driving a significant shift within the retail bank space," Rose said. "And we've seen a growing number of banks choosing to forego their proprietary broker-dealer, corporate RIA wealth management platform in order to tap into a third-party marketer program at an independent broker-dealer to get access to that kind of enterprise level technology solution to enable their advisors to be more productive and efficient, and to kind of expand the range of services they offer to their bank clients."

Rose said COVID-19 has transformed the relationship between advisors and their technology, and it shows in the data.

In the "post-quarantine environment," Cerulli has seen a notable uptick in the use of all core advisor technologies across the board. Most significantly, gains in the use of e-signature technology, client portal technology and tools for document management have become major game changers.

"Another interesting point here is video conferencing. … It is enabling them to be productive and efficient, but it's also had significant ramifications on the quality of client experience, too," Rose said. "I'm a former advisor and my firm was in downtown Boston. And it's a lot to ask a client to come in from the suburbs and drive into Boston, [for] anybody who's familiar with Boston traffic.

"The face-to-face aspect of the relationship is still really important. But being able to provide the flexibility to clients to be able to meet with them as advisors in the format that works best for them is important. So maybe an annual meeting will be face-to-face, quarterly check-ins will be virtual."

"The adoption of some of these more kind of virtual oriented technology tools has been really significant. And the other thing is that there's really no reason that advisors couldn't have been proactively thinking about these technologies as a way to deploy their practices before all this happened. But I think it speaks a little bit to some of the things, some of the culture and the mindset among financial advisors. But I think, you know, I think the industry has gone through a pretty significant shift. And it could have ramifications on the extent to which advisors are more proactive about using emerging impactful technologies in their practice."