Kitces: We’re overdue for better planning software

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Most advisory firms use three core technology platforms: portfolio accounting software to track investment portfolios, planning software to build plans and CRM software to keep track of all their clients. These software solutions generally come at a cost — for some, a considerable one.

Yet as more advisors converge on the AUM model, and as investment management shifts to the background as a supporting service, there will be immense pressure on portfolio accounting software solutions to be cheaper. This could spell some big changes for the advisor technology sector.

But before that happens, we as an industry should be asking a fundamental question that’s ignored too often: Why do we pay so much for some types of technology and so little for others?

Pricing the platforms: Think about how much these software solutions cost the typical advisor. CRM software is usually about $500 to $1,000 a year, or roughly $40 to $80 per month for each advisor who uses it. Planning software is a little bit more expensive, with packages like MoneyGuidePro and RightCapital running about $1,000 to $1,500 a year, with a few like eMoney Advisor priced around $3,000 per year.

Then we get to the portfolio reporting solutions, which are typically the most expensive of all. You’ll often see costs like $40 to $70 per year per account. So if you have 80 clients and they each have an average of three accounts, you have about 240 client accounts contributing to your expense: around $10,000 to $15,000 a year. Indeed, companies like Orion Advisor Services have a $15,000-a-year minimum fee.

Think about that for a moment. As advisors, we’ll pay $600 for a CRM that runs our businesses, and $1,200 a year for planning software, but upward of $12,000 a year for portfolio accounting software. Those are really big differences for things that are all part of a stack.

You might attribute some of that discrepancy to the specialization of the software, which is fair. There are lots of CRM platforms out there, after all. We have industry solutions like Redtail, Wealthbox and Junxure, all of which are built for advisors and are a little more customized and relevant to our industry than the more generic alternatives like Less Annoying CRM, Solve360 or SugarCRM. Meanwhile, planning software and portfolio accounting are more complex to design and build because of the depth of calculations they must perform, and there really aren’t any industry-neutral alternatives.

Still, with all respect to the portfolio accounting reporting software companies, I’m not convinced that the difficulty of designing and programming portfolio accounting software is really 10 times greater, such that the product merits 10 times as much money to license.

Even if the challenges and complexities are real, we won’t pay for it if it becomes so expensive that it’s not worth it to the business. The fact that Orion could charge $15,000 a year while MoneyGuidePro can’t even charge $1,500 a year isn’t just about the challenge to execute and implement the software. Rather, it says something about what we as advisors are willing to pay for in the first place.

Revenue vs. overhead: The advisor’s classic profit-and-loss statement looks something like this: At the top, there’s gross revenue. Out of that, we subtract direct expenses, which add up to the cost of getting the revenue in the door and servicing it. Classically this is where you subtract the cost of the firm’s client-facing advisors and business development people, because they’re the ones that directly solicit and manage the revenue. Often a chief investment officer goes here as well because he or she is the one directly responsible for managing the portfolios that produce the revenue, at least in the typical AUM model.

So we take our gross revenue and subtract our direct expenses, leaving us with our gross profit margin before paying the rest of the cost of doing business. Out of that, we subtract the broad category of overhead expenses of running the business, which includes everything from administrative staff to rent, errors and omissions insurance and also our technology costs, to arrive at the bottom-line net profits.

In essence, there are two different kinds of expenses that get subtracted out here: direct expenses at the top that are for things that produce revenue — i.e., client-facing advisors, lead investment managers, etc. — and overhead expenses that support the operation of the business.

This distinction matters because most businesses will pay much more in direct expenses than in overhead expenses precisely because the former tend to produce more revenue. Firms hire more advisors because doing so lets them get and service more clients, who in turn contribute more toward revenue. This means that the money invested upfront tends to pay dividends down the line.

Overhead expenses, on the other hand, are generally managed to be as low as possible. This is one of the reasons why client-facing advisors get paid substantially more than administrative staff in most advisory firms. It’s also why in most industries, the top salespeople get paid far more than anyone else in the company. In fact, sometimes top salespeople get paid even more than executives because the latter are still considered overhead — some more than others, perhaps.

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Why does all this matter to a discussion about software platforms? While classically all technology falls within that overhead expense category, that’s not actually the way we think about it. If you’re running the typical AUM model and you’re charging clients an AUM fee, portfolio accounting software isn’t really just an overhead expense, but rather more of a direct expense.

Can you imagine trying to charge affluent clients an AUM fee and not even being able to track and report on how you’re doing with the money you’re managing? Clearly you have to be able to report on the assets and how they’re doing, so when your firm charges an AUM fee and needs portfolio accounting software to validate the fee, you’ll accept paying a lot for the portfolio accounting software.

By contrast, in an AUM model that doesn’t charge for planning, the planning work itself is basically an overhead cost. So it may be a cost that has to be there, but as with any overhead cost, it tends to be something we’re more price-sensitive about and something we’ll manage more aggressively.

In other words, one of the forces leading us to pay 10 times more for portfolio accounting software than planning software is that when we run an AUM model, we think of portfolio accounting software as something that drives revenue, while planning software is just a cost to be managed. And so we pay accordingly.

Pricing power: If you extend this line of thought further, it becomes clearer why and how some software providers charge so much more than others — in what should be a comparable solution for a comparable price.

MoneyGuidePro costs about $100 a month, while eMoney Advisor is over $300 a month. They’re both planning software packages, and they’re both very capable. Even so, I don’t think anyone is going to make the case that eMoney Advisor has three times the analytical power to charge three times the price.

But what eMoney Advisor has that MoneyGuidePro does not is its client portal — something that advisory firms can give to their clients to really engage them. These things matter, because when clients link all their accounts to that portal and engage with it, they tend to become stickier clients who are less likely to leave, therefore giving the firm a higher retention rate and a means of keeping more revenue.

I know a number of advisory firms that specifically highlight the eMoney portal as part of their value proposition, and there’s more than one firm out there that actually charges an ongoing monthly fee for planning. They’re basically reselling eMoney Advisor to their clients as an upgraded

By contrast, MoneyGuidePro is just a planning software solution. We generally get what we need from it. But when our primary revenue source isn’t the planning fee, we just don’t pay as much. Whereas eMoney helps bring in revenue with its client-facing portal, MoneyGuidePro ends up being just another planning calculator tool.

I don’t intend to demean MoneyGuidePro and the quality of the solution it provides, but the numbers speak for themselves. Though eMoney Advisor charges triple what MoneyGuidePro does, it has basically gained market share every year for the past decade. That growth, to say nothing of being purchased by Fidelity three years ago, results when software is positioned as a revenue driver and not an overhead cost.

Another case in point is risk tolerance software — namely, the breakout growth of Riskalyze over the past five years. Historically, risk tolerance analysis was something you performed for every client to affirm to regulators that you met the “Know Your Client,” or KYC, requirements before you invested the portfolio. As such, determining risk tolerance was a necessity, but it was an overhead cost. You already had the client and the revenue, and you just had to be able to check the box.

Some firms wrote their own questionnaires, while a few used more rigorous third-party solutions like FinaMetrica. But FinaMetrica always had rather limited market share. And I think it was because risk tolerance assessments were an overhead expense and most firms wanted to manage those down. In practice, people were asking why they would pay for a third-party solution when they could just make a decent questionnaire themselves.

But Riskalyze is different because it’s something you use with prospects to bring revenue in. Instead of just giving risk tolerance questionnaires to clients so they can better understand the portfolios you’re designing for them, Riskalyze made it easy for prospects to make the risk tolerance assessment themselves. You can embed it in your website, you can embed it in your email signature or you can just send it as a quick link to prospects. They they not only take their own risk tolerance assessment but also input their own portfolios to see how their risk tolerance lines up.

And what inevitably happens? Prospects complete the risk tolerance assessment, enter their portfolio, see that their portfolio is over-concentrated and risky — because virtually every do-it-yourselfer is not well-diversified. Riskalyze then effectively scares them into acknowledging how out-of-whack their portfolio is, realizing what they have at risk and that the advisor’s portfolio is better designed, and calling the advisor for help. That progression converts Riskalyze into a revenue driver with prospects, while FinaMetrica was simply used to meet KYC requirements for the client.

Consequently, Riskalyze Pro costs nearly double what FinaMetrica does. Its new Premier platform is almost triple the price of FinaMetrica. And in barely five years, Riskalyze has developed more market share than FinaMetrica did in 20 years, despite coming in at double the price.

This is why the positioning of advisor technology and where it’s used matters so much. We flat-out pay more for software that drives revenue for us, compared to solutions that fall just in the overhead category. And because we want to grow, software platforms that give us revenue growth opportunities have become some of the fastest-growing technology firms in our industry.

Upending tech providers: As more advisors converge on the AUM model, it’s getting very competitive to gather new assets. This in turn is driving advisory firms to differentiate themselves by focusing on more than just investment management. In some cases they’re unhinging at least partially from the AUM model and charging additional planning fees — or even unhinging entirely from the AUM model and just charging planning retainer fees. This is especially prevalent now that we have a payment processing platform to handle recurring retainer planning fees.

But in a world where planning is your primary value proposition and what you get paid for — and you either don’t manage assets at all or you just implement simple index portfolios and focus your time, energy and value elsewhere because you’re really in the planning business — does anyone really think we’re going to keep paying 10 times the cost for portfolio accounting software versus planning software?

As investment management shifts to the background and becomes the supporting service that planners offer, there’s going to be immense pressure on portfolio accounting or reporting software solutions to bring their costs way down as they get shifted out of the revenue-driving category and into the overhead expense category.

At the same time, new doors are going to open for software providers, because if and when we’re primarily in the business of planning and earning fees off of it, frankly our planning software needs to get a lot better to support that.

We’re overdue for the next generation of planning software. But we’ll also pay a lot more for it. If most advisors were paid solely in planning fees and it made us willing to pay $15,000 a year for planning software — not unlike how Orion charges $15,000 minimum fee for portfolio accounting software — what would that software have to do to earn our gratitude?

So much of today’s planning software is limited by the constraints of managing a company. If you only manage so much for your software, you can only hire so many engineers to build it out. But if software companies could charge five to 15 times as much and justify it — because we as advisors could effectively grow our planning fees faster, charge more and add more revenue — what would that software look like?

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On the back of that, what will happen to Tamarac, Black Diamond and Orion when advisors are only willing to pay for portfolio accounting software at 1/5 or even 1/15 the cost per client — the way we do for planning software today?

Perhaps RIA custodians will just start throwing it in for free. Fidelity seems to be operating along those lines with its increasingly robust Wealthscape platform. We’ll obviously still need something, but it’s easier maybe to just let the custodian do it at its size and scale and spare us the overhead expenses. Of course, that introduces some conflicts of interest for us and our ability to change RIA custodians in the future, but that’s a discussion for another day.

To be fair, there are firms that primarily manage portfolios, and they’re going to continue to use that as their value proposition for the foreseeable future. They have a legitimate investment process, they’re good at and it adds value. Consequently, there will still be a need for independently provided, more complex and sophisticated portfolio accounting reporting tools as well, at that higher price point.

But it also opens a door for simpler, low-cost portfolio accounting solutions for all those firms that still need something but don’t need the complexity or high price tag of a full-scale portfolio reporting solution. Maybe that’ll be a growth opportunity for one of today’s smaller portfolio reporting startups like Capitect, Kwanti, Blueleaf or Panoramix. Or maybe a newcomer will grab a seat at the table.

I do think, however, that a major divide will emerge in advisor technology over the next few years. On one side will be the planning-centric firms that want better planning software, and they’ll be willing to pay a lot more for it because it drives revenue. At the same time, these firms will also diminish their willingness to pay for the portfolio reporting solutions. On the other side will be firms that stay on the investment management side and continue to control costs on their planning software, but will pay 10 times the price for portfolio reporting solutions because they need it to drive revenue.

I want to leave you with a little thought experiment. If you were going to pay $15,000 a year for planning software, what would that software have to do? What features would you want and need to create new value for clients and justify higher planning fees? Please share your thoughts in the comments below.

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