Q81 – Is Broker-Dealer Technology Better Than RIA Technology?

Also available as podcast (Episode #81)

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Is Broker-Dealer Technology Better Than RIA Technology?

A tale often told by broker/dealer management is that B/D technology is superior to the technology available in the RIA model.  A few decades ago, they were right!  There was a time that broker/dealers had better economies of scale with technology investments as they had more advisors (users) to spread the investment cost across, versus what any one tech provider in the then RIA space could achieve.  That investment advantage, led to better technology.  That paradigm is now exactly opposite.  With the growth of the RIA model over the past few decades, large RIA tech providers now have more users than any one broker/dealer has, thus reversing the economies of scale advantage. This is just one of many variables that has led to RIA technology now being superior to broker/dealer technology.

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Full Transcript:

Is broker-dealer technology better than RIA technology? That is today’s question on the Transition To RIA question & answer series. It is question #81.

Hi, I’m Brad Wales with Transition To RIA, where I help you understand everything there is to know about why and how to transition to the RIA model.

If you’re not already there, head to TransitionToRIA.com, you can find all the resources I make available from this entire series in video format, podcast format, I have articles, I have whitepapers, all kinds of resources to help you better understand the RIA model, and what it would mean for your practice. Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about the technology differences between the broker-dealer model and the RIA model.

The reason this is such an important topic is because of the impact that technology has on your practice. The efficiency of how you run your practice, the service offering you can provide to your clients.

Technology is extraordinarily important, and will continue to be important. As new innovations, new technologies come along, what can you provide for your clients, and what is your competition potentially providing for their clients? Very important topic.  That’s what were going to talk about on this episode.

The answer to this is oftentimes a big misconception in the marketplace. There are people that will tell you broker-dealer technology is better than RIA technology. I’m here to tell you that is a giant misconception.

For starters, you must be careful who is telling you this misconception. If you are at a large, for instance, wirehouse firm, they will naturally tell you the technology is better where you are at because they do not want you leaving and going to the independent space, the RIA model. So they will tell you, “Our technology is better.”

That’s either because they’re lying to you because they don’t want you to leave, or perhaps they’ve never experienced what the other side themselves looks like. They’re a lifelong branch manager or corporate executive, so they themselves don’t know any better. They just know that supposedly their technology is better than what’s out there.

Now, in defense of the people that say this, there was a time where it was accurate to claim broker/dealer technology was better. You have to go back a long time ago, many, many, many years ago, where there was a time it was true.

The reason that was accurate, and the reason that was fair to say back then, is because of the advantage the large broker/dealers, we’ll pick on the wirehouses, had with economics of scale. They had the most scale to invest and reinvest in their technology, whereas the RIA market back in the day was highly fragmented.

A large wirehouse firm, with maybe 15,000+ advisors, has those 15,000 advisors to spread the tech investment across. If a new feature is demanded, there are 15,000 potential users of the feature, and thus 15,000 users to spread the cost over.

At the same time, again back in the day, the RIA model was so fragmented, there weren’t as many users of any one particular technology, so no one technology solution had that kind of economies of scale to spread the investment over. Hence they couldn’t invest as much into technology as the large broker/dealer firms could.

That has now changed 180 degrees though. While there are still large broker/dealer firms that have 10,000, 15,000 advisors, the RIA model has grown so much, and some of the big technology players are now utilized by so many RIAs, the big RIA tech providers now have more users than the broker/dealers do. In some cases, way more users than the 15,000 advisors that any one wirehouse firm has.

The economies of scale have completely changed. If a broker/dealer used their economics of scale as a talking point back in the day, they must now accept the argument now applies to the RIA model, not the broker-dealer model.

So, just know, at a high level the broker/dealer argument was accurate back in the day, but that has completely changed now. Primarily because the economies of scale have shifted.  RIA technology providers now have more users to spread their costs over, so they can invest and reinvest more than the big wirehouses can justify investing.

With that backdrop, I’m going to discuss some of the additional pros and cons of using broker-dealer technology versus RIA technology.

If you have not seen the separate episode I did on third-party RIA technology stacks, I encourage you to check out that episode. In short, while not the only way to incorporate technology, most RIAs utilize a third-party technology stack.

These RIAs use technology solutions that are separate from their custodian. There are some custodians whose value proposition is to provide you a lot of technology. They have a technology layer in their offering. That could be worth your consideration. But for the sake of this episode, just understand, most RIAs set up with a third-party technology stack that’s separate from the custodian.

An example of why you might want to utilize a third party stack is because your RIA might eventually be multi-custodial, you might have more than one custodian.

If you are using the technology of a particular custodian, and that was your sole technology source, it then makes it a less efficient practice if you’re going to add another custodian. You’d have to use different technology for that custodial relationship. With a third party stack, your main user interface processes stay the same no matter which custodian you’re using with a particular client.

I’ve done episodes on being multi-custodial and how that process works, so you can check those out as well. But with this episode, and the various pros and cons I’m going to discuss, I’m referring to RIAs using third-party technology stacks.

To start with, I’m going to go over some of the cons of using broker-dealer technology.

First is how most large broker/dealer firms use proprietary technology.  Technology the firm has built for themselves. The only users of that technology are their advisors.

Proprietary technology creates several issues. Your technology is wedded to that firm. If you ever want to leave that firm, you can’t continue using any of the technology. It is proprietary to the firm.

An example, which I’m often vocal about is using a proprietary CRM of your firm. If you leave your firm, you can’t take that CRM with you. You can’t take the CRM data with you. That’s an issue of using proprietary technology.

It’s like investing your client’s assets in proprietary investment products of your firm. Those can’t be transferred elsewhere. Why do you think they do that? They don’t want you to be able to leave and make it easy to take those investments with you.

Just as I encourage you to consider not using proprietary investment products, recognize the challenge of using proprietary technology as well. You can’t take it with you. And even if you like it, you can’t take it with you. That is a con of broker-dealer technology. I’ll get into how it’s different in the RIA model here in a moment.

The next con of broker/dealer technology is you can’t easily add new technology tools that come along in the marketplace. Typically these firms are set up that the only technology you’re provided with and allowed to use, is the proprietary technology they have created.

If some cool new technology comes along, if you’re in that broker-dealer world, particularly the wirehouse broker-dealer, you’re not allowed to use those extra tools unless and until your firm has fully vetted it. Until they, not you, have decided to let you use the tool.

I was recently talking to a fintech company and they were rolling out a new software tool.  They told me they weren’t going to bother trying to get it in front of broker-dealer advisors.  It was going to be too much of a process, too much of a headache, too much of a pain to try to get their broker-dealer to approve it. Even with 15,000+ potential users at the broker-dealer, they weren’t even going to try. It wasn’t worth their effort. The chance of it being approved, let along implemented, would take years, if ever.

That’s a challenge. As you hear about new fintech solutions, more than likely, your firm is not going to allow them, and is never going to allow them. And if they do, it’s going to be years after your competition and other affiliation models have started using the tools.

The final con of broker-dealer technology I want to note – and this is not an exhaustive list – is you have no pricing power over what you pay for the technology.

If you are at a large broker-dealer, you are paying for technology.  It is in the inverse of your payout. I talk about this a lot. Whatever your payout is, take the inverse. The portion the firm retains.

That inverse is what you are paying the firm every year for all of the things they’re providing for you. An office, maybe a staff member, technology, things like that. You are absolutely paying for technology now. It’s in the inverse of your payout.

The problem is you have no pricing leverage over what you should pay for technology. Whether you use a lot of the technology, or only a little, you have no ability to manage the cost. It’s bundled up into your payout. You have no control over that.

Now, on the flip side, we go over to the RIA model, you can imagine some of these are going to be the opposite. I’m going to run through a couple of the pros of using RIA model technology

The first pro is optionality. You can use whatever technology you want to use. There are dozens of fintech solutions. You can go out into the marketplace, and if you like a technology, you don’t have to ask your firm if you can use it. You don’t have to wait for your firm to decide how long it’s going to take them to implement it, if they ever do. You don’t have to do anything.

If you like the technology, you do a demo, you meet the team, you figure out the pricing, you do it. You sign up. It is your technology, you implement it.

Now, there are various logistical considerations you might want to be aware of, but if it’s out there and you like it, in the RIA model, you can use whatever you want. You don’t need anyone’s permission.

One of my favorite examples of this, and this is a minor example, but consider a tool as simple as a scheduling application like Calendly. It has been around for years now. It will make your life so much easier to be able to coordinate with clients and prospective clients, and let them pick times that are convenient for them to schedule time to chat with you.

In most large broker-dealers, you’re not allowed to use Calendly. It hasn’t gone through all the approval processes. They haven’t agreed to it. In the RIA world, if you want to use it, you simply sign up and start using it. It’s that simple.

There’s much more optionality in the RIA space.

Next, if the need ever arises you have the ability to change the technology solutions you use. Whenever you want, however you want. You don’t need anyone’s permission. You don’t have to wait. You can make changes.

Now, to be certain, particularly with the larger components of your tech stack, you wouldn’t want to be replacing tech solutions frequently as there is potential disruption associated with it. I’m not trying to give the impression you should makes changes often. But the opportunity is there to do so when warranted.

If a particular provider is not keeping up with their competition, you can change them out to a different provider. You don’t have that optionality in the broker-dealer space. You are using their proprietary technology.  Take it or leave it.

Keep in mind what that means. In the RIA space, if you are a fintech provider, and you know your users can easily, if they wanted to, switch to one of your competitors, you are motivated to constantly evolve your product, make it competitive, make it appealing for your advisor clients to keep using it.

That is an entirely different landscape than the proprietary all-bundled up approach in the broker-dealer space.

The next pro of RIA model technology is pricing competition, which I alluded to prior.

If you’re looking for a CRM, or financial planning tool, or portfolio management tool, there are multiple providers in each of those categories in the RIA space. They must be price-competitive to survive. They can’t just set a whatever price they want.

As you evaluate, for example, a CRM, you can look at multiple different CRM solution providers. Price is not the only variable. You want good value, you want the tool to meet your needs, etc. But price is important.

You control how much you are willing to spend. If one provider wants twice as much as the next, and the value each would provide is relatively similar, you have control over that pricing process and who you are going to select.

When your technology cost is all bundled up into your payout, there is no competition. The big broker-dealer firms know that even if you don’t like the price of the proprietary tech stack that you’re effectively paying, or you don’t like the applications they’ve built out, you have no ability to switch to something else. You have no ability to add something. You have no ability to negotiate pricing.

They know the only thing you can do is leave the firm altogether. Many of you will make that move over your careers, but that is a big process.  They know that, so they can squeeze you on the flexibility of their tech, the economics of it, because unless you take the full step of leaving the firm, you have no say in the matter.

Broker-dealers don’t have the same marketplace competition for technology that the RIA model has. Tech competition is to your benefit in the RIA model. When firms must compete against each other, that’s what leads to innovation, that’s what leads to competitive pricing. You want them competing for your business. You do not have that market environment in the proprietary broker-dealer technology world.

The last pro I want to note is to keep in mind the legacy background behind these two technology paths.

While we call broker-dealers as such, all the large firms are now also RIAs as well. They’re usually dually-registered broker-dealers and RIAs.

Coincidentally, at most of the large firms, most of the client assets are now on the fee-based side of the house, the RIA side of the house. But make no mistake, they are legacy broker-dealer firms. That’s why we still call them broker-dealer firms. For decades they’ve been broker-dealer firms.

Such firms were started primarily or solely as a broker-dealer. They didn’t offer fee-based solutions. They have decades of legacy infrastructure, technology, personnel that is building and maintaining technology from a broker-dealer mindset.  Which was fine originally, as a broker-dealer is what they were born as.

The problem for the big firms is the wind has changed. The industry has shifted to a more fee-based approach to working with clients. But their legacy technology was built with a broker-dealer mindset. These firms are now trying to reinvent themselves to support a more fee-based model.

They are making progress with this, but there is a difference. They’ve built a house, they’ve built a foundation, and now they must rebuild the house, while still living in it.

Compare that to the RIA space. The tools you would use in a third party RIA technology stack are not reinventing themselves at all. These were tools that were built from the start to cater to the RIA marketplace.

There is no legacy infrastructure. There is no legacy way of thinking. There is no legacy personnel that have been there for 20+ years with a broker-dealer mindset. RIA tools were born with RIA in mind from day one. Everything about how they’ve been built is to accommodate the fee-based advisors.

Which of these technology approaches – legacy broker-dealer, or RIA – is most likely to provide for the specific needs of a fee-based advisor?

One side is essentially a giant rusting cargo ship, trying to turn around and head in another direction. The other side are powerboats started from scratch to accommodate the RIA model.

So, these have been a few comparisons of broker-dealer technology to RIA technology. Again, to be fair, years ago, decades ago, the broker-dealers did have the edge. They did have the advantage. It was fair for them to say that their technology was better.

That world has changed. It is a misconception for anyone to tell you that the broker-dealer technology is better than the RIA model technology. That is people either telling you that because they don’t want you to leave and go to the RIA model, or they simply don’t understand it themselves. Feel free to send them to this episode if you’d like. It would be eye-opening for some of them.

With that, like I said, my name is Brad Wales with Transition To RIA. This is the kind of conversation I have with advisors all day long. Where are you now in your practice? What kind of firm are you at? What kind of model are you at? Is this RIA model something you should be looking at? How is it different? How does it work? How do things like technology work in the RIA space compared to what you have now?

I help advisors daily with understanding all this, understanding all the different options they have. I’m happy to have that conversation with you as well.

If you head to TransitionToRIA.com, you’ll find this entire series in video format, audio format. I have articles, I have whitepapers.

The easiest thing to do is at the top of every page is a contact link. Click on that, you can instantly and easily schedule time to have a one-on-one conversation with me, whether you want to talk about today’s topic or anything else RIA-related. I’m happy to have that conversation with you.

Again, TransitionToRIA.com.

With that, I hope you found value in today’s episode, and I’ll see you on the next one.

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