Some good content published recently about the future of financial planning and the need for innovation. What I haven’t seen is much detail regarding exactly what this innovation might look like and where the money could come from to fund it. As I sat in the barbers shop last Saturday, I sketched out a few thoughts that have become this blog post. Might be food for thought, for a few of you innovators and your investors.

First up, why does financial planning need innovation? Where is this disruption coming from? And what is it? Well, advice fees are the only part of the investment supply chain to have gone up in the last decade, so it seems possible that some fee compression might happen. For the record, I think if you’re doing proper financial planning, it’s worth 1% per annum for the vast majority of clients. In addition to fees, there are perennial inefficiencies in many financial planning firms. Some caused internally (task allocation, workflow etc) and some externally (providers and data flow are two important ones). And regulation is, as ever, a massive black hole swallowing any spare resource you might have. Set against these challenges we have organic growth; anaemic in many firms if you strip out underlying equity growth, linked to fees via ad valorem for the majority.

Then we have the macroeconomic challenge. The Baby Boomer generation have been easing into retirement and the owners of the firms that serve them are keen to join them. The next generation of clients have slightly different needs and may be demanding a different/modern service. They may also use a fair chunk of the money they inherit from their Baby Boomer parents, to pay off debt. Gen X didn’t get the compound interest memo, they got the debt-fuelled consumer one.

So, there may well be trouble ahead. But who’s going to cause it? I’m not so sure it will be the well-funded tech giants stealing your lunch. They appear too busy building a new universe (okay, metaverse), which they can no doubt dominate with their own digital currency, much like V-Bucks in Fortnight (yes, I have a 13-year-old son). I’m not sure financial planners are targeting their services at people wearing a VR headset and wandering around a virtual world for hours, stopping at a virtual Dominos and ordering a pizza to be delivered to their real-world abode in under fifteen minutes. You are after a fairly narrow market and it’s not worth a huge organisation going after it. They want mass-market.

No, to find our disrupters I think we need to look a little closer to home. Specifically, the asset management industry. Dominant in the supply chain, profitable due to their ability to leverage intellectual property, keen for growth and always gazing fondly at the power afforded to those that control the last yard of the supply chain. And once they get the joke that financial planning is actually different to financial advice, well, they’ve got the firepower to fund some interesting innovation of their own. We can also expect new entrants to use up some of the mountain of private equity capital looking for a home and existing Consolidators will also no doubt be keen to protect and expand their margins.

Paragraph six, get to the point already. What is this innovation then? Well, a modern business model could include an education platform, coupled to a series of integrated pipes (traditional business models). A prospect discovers your firm and consumes high-quality content that helps increase engagement. As they consume more content they approach your DIY platform where they can play with calculators and other financial planning tools. Critically, they subscribe at this point and become a customer. This allows them to DIY their own financial plan and invest if they want to. They could also become a traditional financial planning client at any stage, if they want the full service (that’s the pipes). Looks a bit like this…

There could be many combinations of the above. Firms will approach this from their area of expertise. By way of a few examples: LearnVest was a company in the US, where they built an education platform and a network of planners if you want a plan (didn’t pan out that way), and United Capital did an excellent job of digitising the financial planning experience before they were sold to Goldman. Betterment, Vanguard, Wealthfront are all attempting to add more financial planning capability to their robo investment offerings.

Now if you’re looking at the graphic and thinking, ‘seems expensive’, you’d be right. The Escalator contains more content than most financial planning firms have thus far been able to muster and the DIY platform could take a whole sack of Codepotatoes to build. You already have elements of the pipes, but they all have to be engineered so data flows throughout the entire system. And that means ERP (enterprise resource planning). A system that gathers data from the very first interaction with a prospect and allows it to flow across every aspect of the structure. Looks a bit like this…

We’ve scoped this a few times and it’s probably between £300k and £500k all in. That assumes you build an ERP system and have full vertical integration inside your investment management pipe (side note, VI works really well in lots of ways and you can use it to deliver a great service to clients, at a fair price, or you can deliver a so, so service and charge like a wounded rhino, which is a challenge for a regulator that seems to perceive price/value as kryptonite). A project like this could easily get out of control and cost £1m + so it’s not for the fainthearted. And it’s not just capital you’ll need. You can’t build kit like this without highly competent individuals to manage all the moving parts of the project, as well as some very bright engineers. It is a lot easier than it was even 5 years ago. In the final year before being sold to Goldmans, United Capital moved their systems over to SalesForce, who now offer an integrated and fully customisable financial planning platform. So you don’t need to start from scratch with every element, but you still need to customise it.

But, and it’s a big but, how many financial planning firms in the UK could build this? Answer is probably none. Not real financial planners anyway. Sure, if you’ve got a firm full of highly qualified order-takers, then you might call yourself financial planners, but if you don’t actually produce a plan that considers the client’s entire life, at the outset of the relationship, you’re not real financial planners are you. Yes, the real financial planning market is fragmented and highly illiquid. Succession is a huge factor and the proximity to exit means few are prepared to bet the farm. Setting up a separate firm to tinker about is all well and good, but the majority of financial planning business owners find it enough of a challenge managing one firm, let alone two. And tinkering won’t build what’s needed.

So we probably need a third party to build it for the financial planning community. A consolidator probably can’t do it, largely because there’s a cheaper way to do something similar (financial advice) and the client doesn’t know any better. If it’s funded by those that make the majority of their profits from investment management, it won’t do what it needs to do. It will just be a better spiders web. The real financial planning market is just too small as it stands. We have a few good software firms supporting this market, but are they going to build this model, I doubt it. Parts of it sure, but that’s not much good when you fire data down an API and it hits an internal brick wall.

The real financial planning market could grow but that means more competition for the incumbents and that’s a whole different blog for another day. What we are left with is outside investors, probably related in some way to the platform space. Retail platforms would really struggle to build something like this, as they are fixed on their own infrastructure and are not generally fans of vertical integration.

Having a third party build this structure for the existing financial planning market, presents some other interesting challenges. Financial planning is a people-based business. If you’re going to create educational content that includes video, then you want the people that will deliver the advice featuring in those videos. You could probably afford a couple of half-decent actors but it won’t be authentic. Each user (firm), need to be able to film at least some of their own content, which means they need a quick and easy way to customise whatever the third-party builds. But that’s a bit in the weeds for what was a few thoughts while I waited for my haircut.

In summary, the real financial planning market needs an integrated platform to deliver financial planning and investment management in a modern, flexible, profitable way. The investment management space probably shouldn’t build it and the market is full of at-retirement business owners who don’t want to take risks with their retirement funds and the younger guys and gals are focussed on their careers as planners and are largely inexperienced with regards to management, strategy and raising capital.


We could have a whip round I suppose.



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