Refining financial planning - getting the infrastructure right

By Yelena Shkolnik

Getting the Infrastructure Right

In the last installation of this series, we discussed the consumer confusion that arises from the opacity around financial planning and management and the opportunities that exist for software to supply advisors with a range of solutions. In this piece, we’re taking a step back and reviewing some of the technical challenges advisors face in facilitating better client experiences.

To differentiate themselves in a highly commoditized environment, advisors have been eager to offer their clients new account and asset types and to incorporate the full gamut of personal financial data to help enable and optimize a holistic, seamless approach to financial planning and management. Advisors face a wide range of obstacles—technological, logistical, and otherwise—to developing such an encompassing offering for their clients.

Broadly speaking, we see these challenges falling into the following buckets: (1) outdated software, (2) custodial restrictions, (3) limited access to alternative assets, (4) what we here call the interoperability problem, and (5) ongoing industry consolidation. In the subsequent sections, we take a closer look at each of these infrastructure challenges and shed light on how they are limiting change within the RIA space.

Outdated software

As briefly noted in our previous post, advisors continue to rely on outdated technology infrastructures. Existing financial planning software is not nearly sophisticated enough to meet the demands of a digital-first era. In order to offer new asset and account types and to develop a fully integrated financial planning product for clients, advisors need software that allows them to incorporate diffuse financial data housed across a fragmented array of platforms and services. Currently, few, if any, advisors are able to connect debt obligations to personal cash flow or projected earnings or bundle car loans together with credit card liabilities. Without software that integrates financial information—mortgage payments, car loans, college tuition, daily spending, to name just a few—advisors can’t begin to offer an accurate picture of a client’s overall financial health.

So, why the lack of innovation? The absence of sophisticated tech is largely the result of a market dominated by incumbent software providers. Dominant players have and retain a meaningful share in this space. These firms were successful in transitioning RIAs to the cloud, improving interconnection but have been slow to further develop their platforms, leaving RIAs to rely on stale integrated product offerings across the advisor stack.

And while there is ample room for disruption, and new tech players are indeed emerging, they face a scattered RIA market with a wide range of conflicting preferences and limited appetite to pay for new platforms that aren’t yet proven to be revenue-generating.

Importantly, many financial activities also continue to be processed manually. Debt paydown is a great example. Managing debt payments frequently involves negotiating live through complicated and time-intensive phone trees and other slow-moving bureaucratic processes.

The challenge here is twofold. First, advisors don’t have the software they need to integrate financial information that originates across a number of different sites and client activities. Second, many financial activities remain outside the digital realm, creating a second order of difficulty when trying to capture the full picture of a client’s financial profile.

Custodial restrictions

The core piece of infrastructure for an AUM-based RIA is the custodian. The custodian is the entity that holds the assets – think Schwab, Pershing, etc. Much of what can be offered to clients or done in terms of portfolio management comes back to the custodian. For example, an advisor can’t offer up visibility into the settlement of specific trades beyond what they get in their custodian portal or offer assets or account types unless their custodians can.

Switching custodians is a meaningful issue; it triggers ACATS transfers that are costly per client and has the unpleasant effect of requiring a new sign-off from the end client. Custodians aren’t known for their innovative mindset; end clients are likely looking at their results in ’90 UX with periodic and hard-to-adjust reporting.

It is a tough margin model because they have to cover the costs of their own technology and infrastructure, and they rely on revenue sources like client cash balances, taking a share of trade flow, income from securities lending, or putting clients into more profitable products. Naturally, small account values are often unprofitable, and smaller RIAs see poor service. In some cases, this is already happening as a result of consolidation (more on that below).

If custodians are that limiting, why haven’t new players disrupted the space? Well, standing up a new custodial service that can legally hold client assets and clear trades is an incredibly difficult project to undertake.

The processes involved with receiving FINRA and state approvals and becoming a member of a clearinghouse are lengthy and cumbersome. There are also meaningful required levels of capital, partially for regulatory clearance on specific assets and partially to prove legitimacy to end clients and counterparties. Basically, a startup would need to show longevity and feature parity on day one, which is a tough ask. The economics are also tough in a traditional approach.

Today, the “Big 4”—Schwab, TD Ameritrade, Fidelity, and Pershing—will continue to command their market share (which currently stands at around 64%) and limit advisors in the sort of investment activity they can branch into on behalf of their clients.

Knowing all this, it’s exciting to see new innovative custodians emerge despite the hurdles with the aim of providing RIAs and traditional custodians with richer functionality. These platforms, or comparable players that simplify the hurdles posed by traditional custodial partners with a tech overlay, can be the backbone of a modern stack for delivering reinvented support to end clients.

Limited access and management of alternative assets

In addition to the restrictions posed by custodians, advisors are also frequently unable to access certain asset classes that have recently been made available by new digital platforms. This is both a logistical and regulatory problem. In order to distribute assets to clients and profit from them, advisors must structure them within sanctioned fund vehicles. As a result, they are prevented from tapping into alternative assets like art, litigation, and certain types of real estate, which competing digital platforms like Yieldst or Rally can offer.

In recent years, thanks to new tech, advisors have been able to gain access to certain illiquid asset classes, like venture capital or private equity. Still, even here, they face particular challenges from a fund management perspective - the administrative and regulatory demands of managing a large base of LPs, including subscription documents and K1 forms, create significant hurdles and require back-office resources that most advisory firms don’t have.

The interoperability problem

Communication is severely limited between RIAs, their software, and their custody solutions. This presents a headache for customers who may rely on more than one RIA or platform or who may want to transfer their assets.

At a time when people are increasingly demanding smooth, seamless digital experiences—the sort they expect from digital-first investing platforms—the digital barriers that prevent interoperability are less than optimal, to put it lightly. Onboarding flows and asset transfers remain exceedingly slow, guided by out-of-date rails. And while the transfer of securities is standardized by DTCC and ACATs, moving cash across accounts (or, worse, transferring a tax-advantaged account) can often take weeks or even months. Never mind what it looks like to transfer tax-advantaged accounts with even more invested stakeholders.

Part of the problem, of course, ties back to custodians, who often have burdensome KYC checks or onboarding processes. But it’s not just an infrastructure problem. There is a severe lack of motivation for parties to come together and solve for interoperability. The technology itself is not difficult to build and incorporate—the issue is no one wants to make outflows easier.

Industry consolidation

One reason why custodians have been slow to adapt to the digital age may be due to the recent and ongoing consolidation in the RIA market. In a market that is already dominated by just a handful of companies, consolidation has arguably produced a condition of complacency within the industry, along with new pressures and complexities that make serving the end customer even more difficult.

In November 2019, Charles Schwab announced the acquisition of TD Ameritrade, and in February 2020, Morgan Stanley announced its acquisition of E*Trade, just a couple of years after E*Trade itself acquired Trust Company of America. As with all mergers, the integration of these companies has led to a focus on margins and cost reductions, which stands at odds with the sort of tailored, high-touch services advisors offer their own clients.

Workforce reductions may mean longstanding advisor clients can no longer work with the client service teams that have historically supported them. In some cases, advisors may find they have to work through chatbots or computers rather than human contacts. Custodians have also begun to reserve top-tier services for only the largest advisors. Even those with more than $1 billion in assets under management are experiencing a decline in the level of service they receive [SOURCE]. Custodians with increased market control may also begin charging higher fees for services that advisors historically received at little to no cost, further impacting advisors and, consequently, their clients.

In addition to consolidation among custodians, merger activity among RIAs has caused issues as well. When one RIA acquires another RIA, they inevitably inherit another custodian. Often, the acquiring RIA won’t opt to transition to a single custodian because repapering, as we noted above, can be prohibitively high. It can also cause concern among end-customers skeptical about using a new advisor.


Several questions arise from this landscape of outdated tech, custodial limitations, and industry consolidation: Do we need entirely new DTC RIA models that build on a better base of software and control their destiny with digital-age custodial services? Or should we patch up aging infrastructure with improved software? Are there customer demands that RIAs aren’t even factoring in that might make the difference? For instance, do clients prefer flat fees for financial planning and assets held in custody, or do they want to lean into the AUM model but with more opportunities to direct or influence the management of their portfolios?

Certain new players are trying to address these questions from the custodial perspective; others are building workflow software to better integrate flows across providers or enable the infusion of alternative client data or client assets into an advisor’s sphere. Each of these new entrants is promising a digital-first experience that offers greater visibility, control, and a more seamless experience for the client that excites us.

If you’re building in this space, tackling the infrastructure or application layers to enable a broader and more relevant vision of wealth management, we’d love to hear from you.

By Yelena Shkolnik

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