June 4, 2018
MutualFunds.com Q&A with David Lyon
The old saying “you get what you pay for” isn’t always true, especially when it comes to technology applications for the financial services industry. Independent financial advisors shouldn’t automatically dismiss free software as inferior to paid solutions. Most of the digital utilities that many consumers rely on every day—such as email, social networks and document storage clouds—are completely free. While the fintech universe has been slow to catch up to other industries powered by free technology, the quality of the free services in the marketplace has increased, providing advisors with viable options for optimizing their practices while cutting fees for investors.
Free Software Disrupts Fintech Vendors’ Traditional Business Model
Some of the most widely used software programs, which have become vital to billions of people and businesses, are mostly free:
- The Google Chrome browser boasts a 63 percent share of the desktop browser market, and a combined market share of 55 percent across all platforms.
- The Adobe Reader and Adobe Acrobat programs are used on more than 1 billion devices globally, with more than 200 billion PDF documents opened every year.
- Spotify, which offers a base subscription for free, is used by more than 140 million people per month, with over 90 million listeners making use of its free streaming music service.
However, in the financial services industry, fee-based and subscription-based software solutions continue to dominate. None of the 28 investment management software products with a four-star or higher rating on the software search and rating site Capterra are free.
The traditional business model for fintech vendors has involved layered fees—high onboarding costs, a pricing structure where basis points increase with assets under management, extra fees for certain investment products and for all new enhancements to the fintech platform. Under this model, software fees increase along with assets under management and client assets—making technology costs a bigger share of overhead as advisory practices grow, and often forcing advisors to pass on the fees they incur to their clients.
Reduce Software Costs While Potentially Decreasing the Cost of Investing
Despite the layered-fee model’s disadvantages for advisors, its status as the norm among fintech vendors can make advisors skeptical of trying free software. But evolving client expectations, greater competition and shrinking margins are making advisors eager to cut costs—and free technology solutions can reduce business costs for advisors while making their practices more operationally efficient and scalable.
Our research at Oranj has found that a wealth management platform offering free portfolio management, rebalancing, risk tolerance, digital advice, account aggregation and file storage solutions can possibly reduce an advisor’s software costs by up to 30 percent per year—and do so without sacrificing the functionality they need to run their practices.
Furthermore, according to our industry research, an advisor can potentially create around $1,375 in annual savings for each client by eliminating overlay and turnkey asset management program fees from their budgets.
In addition to saving money for their practices and clients, free software can also help advisors strengthen client engagement. Although individual investors actively consume digital goods and services, they have generally been slow to adopt digital technology in their financial lives, according to an Oranj industry study released in 2017. The study found that investors are 3.5 times more likely to have an Amazon Prime account than a 529 college savings account. Similarly, while 66 percent of investors use PayPal or other payment applications, only 14 percent have used an online budgeting tool. Providing free access to high-quality digital financial software can serve as a valuable way to engage with clients who regularly utilize digital technology in other areas of their lives.
Fortunately for advisors, free wealth management technology platforms and applications are available from some providers, like Oranj. Adopting free software solutions, like businesses in so many other industries, can allow advisors to optimize their practices, lay the groundwork for scalable growth and save more money for their clients.