Technology's primary role over the last three years has been to allow advisory businesses to be more efficient by effectively sub-contracting out the report preparation and reconciliation functions. A cottage industry of 15 or so companies such as Envestnet, AdvisorPort and FundQuest have emerged as turnkey providers of platforms that provide these services along with investment research and tools. Traditional providers of technology such as Schwab, Fidelity, and TD Waterhouse are in the process of expanding their platforms to provide similar functions to advisory firms.
Over time, as advisory businesses need to operate more efficiently to offset the effects of margin compression resulting from competition, the use of technology platforms will play a larger role in maintaining profitability. It will be a key source of operating leverage for advisory firm owners and professionals.
A second, less obvious change in the role of technology has been the linking of vendors through aggregation software. Companies such as Yodlee and ByAllAccounts offer systems that allow individuals to electronically track all of their accounts and communicate online with their service providers.
The first generation of aggregation software was fairly rudimentary, relying on a "screen-scraping" approach that did not produce useable data. The next generation will be far more sophisticated and will allow end-users to track all of their assets and communicate with all of their vendors on a real-time basis from anywhere in the world. Several of these next-generation software platforms are currently in the beta-test stage, and their developers are working closely with organizations such as Schwab, Fidelity and TD Waterhouse to tie them into their custodial technology platforms.
The long-term effect of this next generation of aggregation software will be to link all of a client's vendors electronically. Once linked, it will be only a matter of time before some advisory firms (in particular large ones trying to take advantage of their scale) begin to offer bundled service pricing.
With bundled service pricing, the client would pay one flat fee for all services, such as tax preparation and advice, estate planning, insurance, financial planning, etc. Multiple vendors would still provide these services, but they would all be compensated out of that one flat fee.
Bundled pricing mechanisms are commonplace in other industries, such as software and phone service. They allow larger competitors to change the fee structure of an industry and make it harder for smaller competitors to remain profitable.
Bundled pricing will likewise allow larger advisory firms to force all industry participants to do more for clients for the same price. As more individuals are linked electronically to all of their service providers, it will be far easier for larger organizations to implement these kinds of pricing structures across a wide variety of clients with many different vendors.
Implications Of Market Correction
The recent drop in the equity markets has provided advisory business owners with a preview of some of the margin compression that will sweep through the industry over the next four to seven years. For many years, the largest client of many advisory firms was the market. The S&P 500 delivered average annual returns of 18% in the 1990s, simultaneously increasing advisory revenues almost automatically every year.