More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
In the first part of this post, we discussed the dramatically shifting technology landscape fueled by two major trends. The first is the rise of the Internet and an ever-growing amount of bandwidth that has made it possible to interact with software primarily through digital connectivity. The second has been the emergence of application programming interfaces (APIs).
So how will these trends play out for financial planners and impact their use of software in the coming years? There are several powerful implications.
The first is that the center of gravity for industry software is shifting, from proprietary solutions within companies to independent companies that can serve a wide range of advisors across companies. After all, from the software company's perspective, when advisors can access any software from any place—without needing to rely upon the software produced by the firm they work for—the potential base of advisors that can use the software grows.
As a result, the number of advisors who use independent software solutions can become greater than the number of advisors using a proprietary solution... which means the independent software companies become the largest, and it's no longer good business strategy for firms to create their own proprietary software. In practice, this trend is already under way; for instance, financial planning software MoneyGuide Pro now has far more users than even the largest of the major wirehouses or insurance companies, as does Redtail CRM.
In fact, now even major firms with a significant number of advisors and hefty resources typically don't build their own proprietary solutions from the ground up; instead, they use (or private label) an independent provider's solution, and at the most simply adapt and partially customize it from there to fit their company's and advisors' own specific needs. The reason this really matters? With a larger pool of potential advisor customers in play, the business opportunities for technology startup firms serving the advisory industry is far greater, and the pace of software innovation and entirely new solutions for advisors is accelerating, after being relatively stagnant for years.
Another consequence of the shift from proprietary to external (or private-labeled) independent solutions is that advisors now have more flexibility than ever to change which firms they affiliate with, confident that a similar (or exactly identical) software solution will be available on the other side.
In other words, if you're used to a certain financial planning and CRM software solution within one firm, there's a good chance you can use the same software at another firm as well (albeit perhaps without quite the same customizations). In addition, key client data is more accessible than ever, as the API connections are built between various software companies. The end result: advisors have more flexibility to affiliate with whatever company is the best fit for their business and client needs, and have a newfound freedom and flexibility to make changes without being shackled to their current firm because their client and business data is held hostage. In fact, the explosion of quality independent software solutions has likely done a great deal to grease the wheels of the breakaway broker trend.
The rise of the software API also bodes well for another eternal challenge of advisors: finding the software "Holy Grail"—that integrated solution of CRM, portfolio management and reporting, and financial planning software with communication and business management tools, all on one central platform. Over the years, a high quality software "holy grail" has been forever out of reach. Most software providers only know how to program their software niche, not a holistic solution, and those who have tried often end out producing a solution that sacrifices quality and flexibility on the altar of integration; the end result is that the integrated software may have all the different components talking to each other on one centralized platform, but each part of the software is inferior to standalone best-in-class solutions in each category.
With APIs that allow software to integrate, though, a new "holy grail" solution emerges: to simply buy the best-in-class solution for each and every type of software required (CRM, financial planning, portfolio reporting, etc.), and get an independent programmer to use the available APIs to make all the software components integrate and communicate cleanly with each other!
The Rise Of The Independent Integrators
In turn, this leads to what are now just the early stages of a major new trend in the advisor space: the rise of the "middleware" programmers and integrators specialized in the software that is built for advisory firms. Just as the iPad and Android platforms have drawn in a plethora of software companies designing "apps" for people to use, so too are software companies and programmers emerging who will work with advisory firms and the available software APIs to make integrated, custom-programmed solutions for the firm's specific needs built on best-in-class software infrastructure.
Early examples of this trend include companies like AppCrown, which markets software integrations for advisors using the Salesforce software infrastructure and API; similarly, TD Ameritrade's Veo open-access initiative is designed to encourage these types of integrations and growth in this space. Ultimately, such integrators also help to support use of the large open-API software platforms in the first place, too; for instance, much of Salesforce's growth in both the financial advisory and other industries has been built on the backs of integrators who sell their own services, and support the sales of the cloud-based platform along the way.
In the long run, this presents significant challenges for industry-specific solutions (e.g., Junxure CRM) to compete with larger platform (e.g., Salesforce) solutions and an army of integrators recommending it, although thus far this shift has been tempered by the fact that industry-specific solutions are really built for the industry and are often ready right out of the gate, while with software adaptations from outside the industry it can take a lot of adapting and integrating to really make the software viable.
Nonetheless, the pressure is on for many industry niche firms to continue to adapt rapidly, or figure out how to develop a broader API to make their software more customizable, as the size of the opportunity for startup firms as middleware providers and integrators is going to attract a lot of new providers (and even venture capital to fund it) to serve advisors.
Perhaps the biggest benefit of all these trends, though, is simply that the software being developed for advisors today, especially using the infrastructure of the cloud, is simultaneously cheaper (especially when accounting for the servers and hardware no longer required), far more efficient (due to both the API integrations and the accessibility), showing more innovation (with the introduction of new startups), and just downright superior to anything we've had in the past. It may not be long before every firm can have its own "holy grail" solution, built to its own planning and investment philosophies, processes, and specific needs and desires; it won't be technology that replaces planners, but instead tools that significantly augment them.