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Kitces, Moore crowdsource $2M to fund next payment tool

Venture capital firms have been a lifesaver for startups looking for a quick influx of capital. But, what happens when VCs don’t see the potential return on their initial investment?

Go to the crowd.

XY Planning co-founders Alan Moore and Michael Kitces crowdfunded $2 million in seed money for a new venture to offer a payment system to large financial institutions, according to the firm, which was fully funded by members of the financial planning community.

AdvicePay Enterprise was built over the past four months and specifically designed to help organizations that support large numbers of advisors in collecting fees from clients. For instance, a home office portal enables firms to centrally manage billing and payment processing, while allowing for local flexibility at the advisor level.

“As the fee-for-service movement in financial planning gains momentum, more and more advisors are working with clients by directly charging for their advice outside of or alongside an asset management fee for portfolio management,” says AdvicePay CEO Alan Moore, adding that the firm is already working with some of the largest institutions.

Current billing systems present a number of compliance oversight issues ― like triggering an SEC custody audit ― for larger financial institutions that service hundreds or thousands of advisors, Moore says. “Firms have been looking for a solution to support a fee-for-service model that is compliant and relieves them of the operational nightmares of manual processes for handing a high volume of fee payments,” Moore says.

fee-based AUM

Advisors do not have access to clients’ private payment information and all payments and changes in billing need to be pre-approved by clients, meaning less regulatory headaches for advisors, says the firm.

“The interest for an enterprise version of AdvicePay to meet the specialized needs of larger organizations serving advisors has been tremendous,” says Moore.

After a blog post on Kitces’ Nerd’s Eye View blog, the firm was able to secure full commitments for the entire funding in less than two months, says Kitces, who is also a Financial Planning contributor. “As a solution built by financial advisors, for financial advisors, we knew the advisor community would immediately understand the need and problem that AdvicePay was built to solve,” Kitces says in a statement.

While venture capital funding plays a vital role for fintech startups, the high-risk, high-reward nature of the business makes is difficult for some smaller projects to gain attention, especially when VC firms don’t see the potential for explosive returns, Kitces says. “VC funds will often shy away from viable business opportunities that are not deemed to be ‘big enough’ to be the home runs necessary to make up for all the potential losses of the companies that don’t work out,” Kitces wrote in a blogpost.

AdvicePay raised $500,000 in seed funding in 2017, after a beta program was launched to XYPN members in 2016, and had over 280 advisors live on the platform as of last year, according to the firm. Clients enter their credit card or banking information directly into the system and manage their information through a client portal, which allows advisors to bill and collect fees directly from a client’s credit card or bank account via Automated Clearing House transfers. Traditionally, these advisors filed paper checks to clients on a recurring basis.

Industry guru Michael Kitces, who, along with his business partner Alan Moore, addressed a standing room only crowd at TD Ameritrade's annual conference. Image: LILA Photo for TD Ameritrade Institutional
© LILA PHOTO for TD Ameritrade

However, VCs firms were less interested in providing the additional funding needed to bring those same services to enterprise clients, Kitces says in the blogpost. “As we heard from one recent venture fund evaluating our own AdvicePay solution: ‘We are going to have to respectfully decline. … Our broad concern is over whether the company can reach the scale we need to see for our target return profile' ” of $50 million or more in revenue.

AdvicePay Enterprise software starts at $100 per month per user, according to the firm’s website. The professional model costs $50 per month and offers unlimited client accounts, while the basic edition runs $10 per month for up to 10 clients.

Crowdfunding was expanded under the Jumpstart Our Business Startups Act of 2012 and the SEC has always permitted raising capital from private investors under certain circumstances, Kitces says. But the popularity of crowdfunding has exploded in recent years and became a viable way to raise significant capital. Websites like Kickstarter and Fundly are two of the largest firms that organize crowdfunds for individual entrepreneurs.

And the popularity of new pricing models could make AdvicePay a much-needed tool for the advisor of the future. While AUM fees still dominate the current pricing structures at typical RIAs, non-traditional fees are gaining ground. In 2018, almost all firms registered with the SEC at least partially used a percentage-of-assets fee model. But 43% of firms also used fixed fees and 30% also charged by the hour, according to industry data.

Indeed, assets in the fee-based channel have ballooned to $4 trillion in 2017 ― up from $1.5 trillion in 2005.

“As the fee-for-service movement in financial planning gains momentum, more and more advisors are working with clients by directly charging for their advice outside of or alongside an asset management fee for portfolio management,” Moore says.

Correction: The headline of this article has been updated to reflect XY Planning and AdvicePay are separate entities.

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