How wealth management firms plan to move beyond the coronavirus pandemic may reveal an emerging gap between how large and small practices can invest in technology.

Most advisors intend to increase their tech budgets over the next year, according to Financial Planning’s annual Tech Survey. Four out of 10 firms plan to keep budgets consistent, while only 2% are planning a decrease. Another 2% aren’t sure.

But a different picture emerges when looking at survey responses according to a firm’s assets under management. A quarter of advisors at practices with at least $1 billion AUM say their firm already spends more than $5 million per year on technology (another 31% either didn’t know or preferred not to say), and 73% plan to increase that investment over the next 12 months. Sixty-one percent of firms with between $100 million and $1 billion AUM also plan to increase technology outlay, though the majority of these practices are spending less than $500,000 annually.

On the other hand, firms with less than $100 million in AUM are the least likely to increase technology spending. Only 47% anticipate investing more, even though nearly all of them (91%) spend less than $500,000 annually, while 49% plan to keep budgets the same.

It could be a sign that small, independent firms are hitting a limit of what they are willing or able to spend on technology, especially after COVID-19 and the move to remote working forced many to adopt digital client communication tools. Six out of 10 firms — and 55% of small firms — say they prioritized technology spending over other practice needs in the past 12 months, Financial Planning’s survey found.

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When asked how they are addressing technology gaps exposed by the pandemic, 69% of large firms and 66% of mid-sized firms said they are investing in new technology. Just under half of small advisors said the same; the rest are instead focusing on better using existing resources.

Small advisors aren’t worried about keeping up with the expensive technology at the larger firms because they target different markets and use affordable third-party options — even if there are some compromises.

Derek Delaney, founder and lead planner of PharmD Financial Planning in Owatonna, Minnesota, says he is “proactively sacrificing some traditional amenities that an RIA usually has, like office space, to allocate those dollars toward technology.” While he believes small firms can piece together a tech stack of affordable third-party vendors, it might not have the same operational efficiencies of the expensive software developed for someone with a larger budget. But it’s worth it, he says: “That is a trade-off I am willing to make every day at this point in my firm’s tenure.”

For example, Bloomberg may have the best technology for investment research, but it just isn’t affordable, says Jordan Benold, a certified financial planner at Dallas-based Benold Financial Planning. But the firm can try lower-cost alternatives like Y-Charts or Kwanti for a fraction of the cost, and cancel the subscription any time if it isn’t adding value.

Marianne Nolte of Imagine Financial Services in Fallbrook, California, says some of the best digital additions to her firm have been free versions of software like Zoom, Grammarly (for grammar and spell-checking) and MailChimp (to email newsletters).

“Not a dime spent, but my efficiency has risen greatly,” Nolte says. “The slow-moving giants may have a lot of money to throw at creating proprietary tech solutions, but this does not mean it is better than what the smaller masses are utilizing.”

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The advisor as quarterback
However, smaller firms could find themselves falling behind the larger firms investing significant capital in building unique product offerings, says Alois Pirker, research director for Aite Group’s wealth management practice. This is especially a risk as the largest financial institutions — the banks and wirehouses — introduce next-generation wealth management technology platforms that connect products and services across multiple business lines in tightly integrated packages.

“More and more, [advisors] get asked to be the quarterback across the client’s entire financial life, not just investments,” Pirker says. “It takes resources, tools, data and people to manage all of that. It’s hard.”

Where large institutions really have an advantage is in emerging fields like big data analytics, machine learning and early applications of artificial intelligence, Pirker adds. These can be the next real differentiator for firms that get them right, but they are very expensive to develop and implement.

The emerging industry dynamic is somewhat akin to Amazon versus small bookstores. “It’s an extreme comparison, of course, but you’ve got to be focused, nimble and really have a clear business model in mind to be successful as a small advisor,” he says.

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The swinging wealthtech pendulum
Wirehouses are better positioned to take advantage of some of these next-generation technologies, but that doesn’t doom independent advisory firms, according to Michael Kitces, a Financial Planning contributor and co-founder of the XY Planning Network, a coalition of more than 1,000 RIAs, many of which are smaller firms targeting Gen X and millennial investors. In fact, a more apt analogy for the advisor technology landscape would be a swinging pendulum, he says.

In the 1990s, wirehouses owned the best software for trading, managing portfolios and financial planning. The internet, cloud computing and new software development strategies gave rise to third-party fintechs building innovative software to match and even leap past what advisors could find at wirehouses. This helped fuel the move to independence over the past 20 years, and in turn made these technology startups attractive investments for custodians as well as venture capital and private equity firms.

After years of wirehouses deploying considerable resources to acquire startups, build next-generation software of their own, incorporate advanced data analytics and solve the integration problem that still plagues independent fintechs, the pendulum is swinging in the other direction, Kitces says.

“The next stage is starting to begin, and because it’s so focused broadly around automation, which is particularly profit-enhancing for large-scale enterprises, I do think you’re seeing a disproportionate amount of investments,” he says.

But the pendulum will eventually swing back the other way. If financial institutions find success with these new technologies, it only validates the business case for a fintech developer to replicate the functionality for independent advisors, Kitces says.

“If wirehouses demonstrate how to do this well with practical business applications, someone’s future pitch to a venture capital firm is a next-best-action engine for the independents,” he says. “It just takes several years to play out.”

Where custodians fit in
Custodians have a role to play in helping the entire independent market — large and small firms — keep pace with the wirehouse channel, especially as advisors increasingly demand more tightly integrated technology ecosystems. Fidelity, for example, is focused on making its Wealthscape platform a holistic tool that will largely meet advisors’ needs, while bolstering support for other third parties.

It’s not a surprise that smaller advisors are looking to get more out of existing technology rather than invest in something new, says Lisa Burns, head of platform technology at Fidelity Investments.

“Most [advisors] use about 20% of the functionality, and that is starting to change,” Burns says. “We are hearing and seeing that they are wanting us to provide more and actually adopting more of what we provide.”

Charles Schwab, which has faced questions about how it will support the small advisory firms on the TD Ameritrade custodial platform it acquired in 2020, offers its Portfolio Connect platform for free to advisors with less than $100 million in AUM and those who custody exclusively with Schwab. The program has seen a “good uptick in usage,” says Andrew Salesky, senior vice president of digital advisor solutions.

“All advisors, generally being small business owners, they’re all expense-sensitive,” Salesky says. “They’re already spending a considerable amount on tech, and just looking to get more from it. As a custodian, we are seeking to enable that.”

“Too small to be big, too big to be small”
As for why many small advisors aren’t planning to increase their technology budget, it could just be the fact that most smaller firms are newer and already using modern software, while larger firms are more likely to have outdated systems, Kitces says. And new technology often only produces a few percentage points of increased productivity — enough for a measurable impact to a large firm’s profits but less meaningful for a sub-$100 million advisor, he adds.

“Small in this nomenclature is almost all solo advisors,” Kitces says. “Once you get to where you’re comfortable with your technology, you reach a point where it’s not all that appealing to make changes.”

If anything, the large RIAs could face escalating technology expenses as they continue to grow, but before they are big enough to afford to build in-house tools like a wirehouse can.

“Just from a pure profit margin, small firms are doing fine,” Kitces says. “The challenge large firms are finding is it’s really hard to scale an advisory firm when you’re too small to be big, and too big to be small.

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