Also available as podcast (Episode #59)
What Is An RIA Technology Stack?
An RIA technology stack (“tech stack”) is comprised of various tech tools needed to run a modern day RIA. This includes performing back office functions such as the creation of performance reports, rebalancing client accounts, calculating fee billings, keeping track of clients and prospective clients, etc. Another element of the stack is how it is integrated with the various data sources needed, such as your custodian(s). The stack often also plays a role in client facing functions such as financial planning collaborations and a client portal. These various pieces are brought together to create a “stack” that fulfills the unique needs of each individual RIA.
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What is an RIA technology stack? That is today’s question on the Transition To RIA question and answer series. It is question #59.
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, if you head on over to TransitionToRIA.com, you can find all of the resources I mention on today’s episode. The show notes, the entire video series, podcast series, whitepapers I’ve made, all sorts of resources to help you understand the RIA model. Again, TransitionToRIA.com.
On today’s episode, we’re going to talk about what is an RIA technology stack, or commonly referred to as a tech stack.
If you were to move into the RIA model, part of what you would have available to you either because you would build it out yourself under your own RIA or potentially join an existing RIA that would provide it, is a technology stack. And so the question is, what exactly is that and what goes into one? That’s what we’re going to talk about here today.
To start with, I want to touch on a few quick items on why technology is so important in the RIA model. The first one is the reality that advisory practices have become much more efficient over time. There was a time when to rebalance a client’s account involved dumping data into a spreadsheet, doing some calculations, and then account by account going in and manually adjusting the account to rebalance it back to whatever the desired parameters are.
Now you can rebalance your accounts with a single click. And in some instances, it’s not a click at all, it’s set to do it automatically based on particular rules you have set for the account or parameters. You say, “Under these circumstances, then rebalance in this fashion.”
That’s just one example, but the reality is technology continues to rapidly evolve, and to stay competitive with your peers and what investor-clients are going to expect, you must stay competitive with technology. That trend is never going to change.
It’s important to understand, how do I build that in the RIA model? What does that look like so I can take advantage of that technology?
Related, and this has been spoken about over and over again is fee compression in the industry that, oh, advisors are going to have to lower their fees. And the reality is if you look at some of the studies over the past couple of years, that that is not really happening. The fee is generally not coming down. It varies by client size, household size, things like that. But, that fee is holding firm.
What has happened though is advisors in turn have generally had to provide more value, more services for that same fee than they did before. Where once upon a time perhaps solely the construction of an asset allocation and occasional rebalance was enough value to justify the 1% fee, the world has evolved to the point where perhaps you need that and other value-added services in the mix as well.
Question is, well, how do you do that without shrinking your margins any more than necessary?
Technology can help with a lot of that by automating things, making processes more efficient. Again, that rebalancing example, what you can do with one click nowadays, but potentially could have taken dozens of hours of staff time or your time previously.
That’s where technology remains super important is to make sure you are staying efficient and that then you can still get healthy margins from your practice while holding your fee, while providing more services.
The last point, I give full credit to Michael Kitces on. Years ago when robo-advisors were first coming out, there was a belief by some in the industry that robo-advisors were going to destroy the business model of financial advisors. They were going to put financial advisors out of business.
Kitces rightly predicted then, and it’s certainly borne out to be correct, that robo-advisors would not at all put financial advisors out of business.
Yes, they would capture a part of the market, which in many instances, is a market financial advisors can’t effectively serve anyway. He predicted though that technology would make advisors more efficient. Advisors would adopt the same technology, whether more streamlined account opening, rebalancing tools, how you present a client portal to a client, etc. We are absolutely seeing that. That trend is going to continue.
That’s a quick high level of why technology is so important. We could talk about that for hours and hours, but with that background, I now want to talk about how technology works in the RIA space, and then we’re going to talk about how you would build a tech stack.
There are two main ways to how a tech stack works in the RIA model.
When talking technology, it’s important to consider how that matches with a custodian. Or for some, more than one custodian. I’ve done several episodes on why you might eventually be multi-custodial as they say.
Your tech stack essentially gives you a way to access your client’s accounts with the custodian and do things like creating performance reports, rebalancing accounts, those sorts of things.
As far as custodians go, there’s two primary ways the technology could be incorporated. There are some custodians where their value proposition is to have an integrated technology solution. They say, “Mr. or Mrs. Advisor, you start your RIA, you come use us as the custodian, and we provide you all of the technology you will need. It’s fully built-in, it’s plug-and-play. You sit down, turn the computer on, everything you need is right there.”
There’s some good technology built into some of those integrated solutions. There can be challenges with it as well though. Consider if one day you might need/want to work with more than one custodian. Again, check out my other episodes on why that very well might be the case that you’ll be multi-custodial.
If you feel you’ll only ever be single custodian for the balance of your career as an RIA, and you like the technology that that custodian provides, and you feel they will stay just as cutting edge with any of the other technology solutions out there, then that can be a wonderful solution for you. It is easier, it is integrated, it is plug-and-play.
The reality though is when you deviate from that, if you do at some point become multi-custodial, if you want to use other technology solutions that the marketplace has released, it can be very hard to do so on top of an integrated solution. So, such an approach has limitations as well.
Opposite of using an integrated solution is to have third-party technology or a third-party tech stack. That is the typical route taken in the RIA model. What this is means is you build a tech stack that is separate from your custodian(s).
You need to make sure the stack integrates via data feeds to the custodians because that’s where it gets information about your accounts, but other than that, it is independent. It’s not owned by the custodian. It doesn’t only work with one custodian.
That third-party independent tech stack is the interface you work with on a day-to-day basis. Behind the scenes, the tech stack knows, perhaps when it comes time to do a rebalance that, oh, this set of accounts is held at this custodian, and this set of accounts is held at this other custodian. When you hit the button to rebalance, it knows where to send the trading instructions to incorporate those rebalances.
You could build it out for if you use one custodian or multiple custodians. A “third-party tech stack” is what that is generally referred to. Again, that’s the norm of how most RIAs are set up.
The question is, what goes into a tech stack?
There are hundreds of FinTech vendors out there, and that seems to keep growing. There are a lot of different solutions you could potentially incorporate. I’m not going to try to cover all the different bells and whistles because even if I attempted to, besides the fact that this episode would be incredibly long, it would soon become outdated because there are always new solutions coming along. That’s a wonderful thing, but it also adds to the complexity of sorting through all those options as well.
At its core, there are basically three main pieces to a tech stack, which I’m going to go through and then we’ll dive into some related details.
The first step, and typically how you build a third-party tech stack, is you start with the core piece often referred to as a portfolio management tool. This is the main hub that you interact with. It provides things like a rebalance tool, performance reporting, client portal, etc. It covers about ~70% of the technology you need in one solution.
That was not always so bundled up. The main portfolio management solution providers nowadays all started more fragmented. Maybe they were originally a performance reporting tool or a rebalancer. For competitive reasons and the demand for it, they have since expanded their capabilities, or they’ve acquired tools and bundled them up. You now have these core portfolio management tools that provide, again, arguably 70%-ish of the technology needed in one bundle.
A key is you want to make sure that the portfolio management tool talks to your custodian. That’s how it gets the data to be able to generate the performance reports, to be able to do the trades and things like that.
When you build out a tech stack, the typically choose the portfolio management system first. From there, the other two main parts of a tech stack is a CRM, your customer relationship management tool, and a financial planning tool.
Some portfolio management providers have CRM and financial planning tools built-in. More typically though, those are things you source individually because there are some wonderful CRM tools out there. There are some wonderful financial planning tools. Most of the portfolio management tools have accepted that their in-house versions are not going to be as good as the wonderful tools that are out there.
Instead, the portfolio management tools integrate with the leading CRM providers and the leading financial planning software providers. You can build your tech stack around the portfolio management system, and everything will talk to each other.
So again, the three main pieces of a tech stack are the core portfolio management component, a CRM, and a financial planning tool (to the degree you incorporate financial planning into your practice.)
While those are the three core pieces, you can “bolt on” additional tools as well. There are some very cool resources available. The key variables to think through is does a tool integrate with my custodian, and/or does it integrate with the core portfolio management or maybe the CRM?
I want to finish with a couple parting thoughts. I’ve mentioned that the portfolio management tool is usually the core piece of a tech stack. There are growing voices now saying that the CRM is the most important part of a tech stack. That’s where everything revolves around your prospective clients, your existing clients, how to follow-up with your clients, those sorts of things. The opinion is that the world has evolved to where the CRM should be the first tool chosen, and then everything should connect to the CRM.
I wouldn’t bet against that. I think we’re seeing that. I think that will continue to evolve. It’s not necessarily a bad thing for some of these other providers because as long as they can integrate, it’s just a question of what’s thought of more as the core piece.
I wouldn’t be surprised if the CRM does become the main interface, with other tools feeding into it. Versus, say, a portfolio management tool as the core piece. So stay tuned. We’ll see how that evolves. Either way, these tools are still going to be out there. It’s more just what you build your tech stack around, as the starting point.
Another point I mentioned, and I did an episode on this not too long ago, is that a number TAMPs (Turnkey Asset Management Programs) in addition to providing their core asset management solution, which is at the heart of a TAMP, have also started to evolve where now some of them are providing a lot of technology as well.
In some instances, as you look to build your tech stack, you might be able to check a lot of the needed tech boxes based on your TAMP provider. Now some of you won’t need a TAMP provider. That’s for if you utilize third-party asset management solutions like separately managed accounts or model marketplaces or things like that. Which now, even some of the portfolio management tools have model marketplaces as well.
If you’re not going to use a TAMP in your practice, this is a moot point. But if you are, then you need to determine what technology, if any, your chosen TAMP provider will provide. They might check some, if not most, of the boxes that you need to check to build a tech stack. It’s another variable to consider as you work to put all of this together.
The last item I’ll mention, is just because a new tech tool comes along, it doesn’t necessarily mean you as an RIA will be able to easily utilize it. If that tool needs a feed of your client data or needs to aggregate in data from somewhere, it has to be able to integrate with the sources of that data. Whether that’s directly with a custodian, a CRM, or maybe with a portfolio management tool.
That’s one of the challenges of being a new FinTech provider. You hope to attract advisors to use it, but at the same time, you need to go out to custodians or other tech pieces and try to get integrated with them. It’s the chicken or the egg problem. Advisors don’t want to use a tool that’s not integrated yet, and these custodians or tech stack pieces don’t want to expend resources to integrate with yet another piece of technology unless they have users.
If the solution is good enough though, it finds a way. We’ve seen that in the marketplace with some great solutions that have come along that are integrated with a lot of custodians, main tech stack providers, etc.
We could talk for hours about the different tools and resources available from a technology perspective. But I hope this has been helpful for understanding what a tech stack is, what goes into one, how you build one, etc.
This is mostly related to if you’re starting your own RIA. If you’re joining an RIA – I did a whole episode on that – part of their value proposition is to build and provide a technology stack for you. They’ve sourced what they believe is best-in-breed technology. They make sure it’s all integrated. That’s an example of why some advisors join an existing RIA, because that’s already done for them.
Either way, it is a tech stack, whether it’s integrated via a custodian, whether it’s you as an RIA building the tech stack, or you’re joining an existing RIA platform that provides it. It is an ensemble of different technology solutions that are brought together to fulfill the needs of running your practice. Hopefully this has given you a good idea of what a tech stack looks like.
Like I said, my name is Brad Wales with Transition To RIA. If you’re not already there, head over to TransitionToRIA.com. You’ll find the entire series of RIA explanatory episodes I’ve made. I have them in video format, podcast format, I also have whitepapers. All are free to access.
The easiest thing to do if you have any questions on this topic or anything related to the RIA model, at the top of every page of the website is a contact link. Click on that. You can instantly and easily schedule time to have a conversation with me regarding anything related to the RIA model and what it would look like for your practice if you were to transition to it. Again, TransitionToRIA.com, I’d be happy to chat with you.
With that, I hope you found value in today’s episode, and I’ll see you on the next one.
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