In the span of barely 10 years, companies like Uber, Airbnb, Facebook and Alibaba have experienced explosive growth, far surpassing the growth rate of their respective industries — despite not actually producing anything.
Yet that’s the whole point. They are platform businesses, and their role in facilitating a marketplace between consumers and producers is the primary form of value creation, not the production of goods or services themselves. These platform businesses have been out-competing or outright disrupting their respective industries, raising the question of whether — or when — the platform model will come to financial services as well.
The financial services industry, though, is already filled with platform businesses. Arguably, stock market exchanges are among the oldest and original types of platforms to connect buyers and sellers. And custodians and broker-dealers constitute a form of platform business as well, connecting advisors and the asset managers who want to reach them.
Envestnet is quite possibly an even purer form of platform business, avoiding the hassles of being the custodian or doing the clearing, and instead just serving as the technology that facilitates matchmaking between advisors and asset managers.
Every firm's focus is on capturing a share of the predicted $7 trillion market by 2020.
Still, this means the door remains open for an actual advisor matchmaking platform: one that connects consumers directly to advisors themselves. Prior attempts at this model have largely failed, likely due to most advisors being such generalists, which makes matching them effectively with consumers difficult. A successful platform would need to focus not on pairing consumers with advisors, but on helping consumers find advisors who can answer their particular questions. This in turn would force advisors to actually choose a niche specialization by which they can be matched. Consequently, the real platform opportunity of the future is not an advisor platform, but a financial advice platform.
RISE OF THE PLATFORM
For most of history, the traditional business model has been some form of pipeline business: one where the consumer buys a product or service that is delivered by the business in a series of linear steps from one end of the pipeline to the other. With a relatively simple product or service, the consumer may buy directly from the original producer. In more complex businesses, the pipeline may be elongated, with one company designing the product, the next manufacturing it and another distributing it for sale, and each business adds some value — and earns its keep — along the chain.
Platform businesses can grow and scale far more rapidly.
In the past decade, though, we’ve witnessed the emergence of an entirely new model: the platform business. The key distinction is that while pipeline business models are limited to how quickly producers can create a good or service and push it through the pipeline, the platform business uses technology to connect consumers and producers directly, taking a small slice of the transaction. The key distinction: By being the connector of other buyers and sellers without being in the business of buying and selling directly, platform businesses can grow and scale far more rapidly than was otherwise possible with any past business model.
Thus, in the span of barely 10 years, some of the world’s largest companies have sprouted seemingly out of nowhere, dominating industries whose incumbents have been around for decades, despite the upstarts not actually producing any goods or services. The key driver that makes the platforms so extraordinary: network effects, or the phenomenon that the more people use the platform, the more desirable of a marketplace it is for other people to use.
Which raises the question: What industries will be impacted next? And is it only a matter of time before the platform business model consumes the financial services industry, too?
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FINANCIAL SERVICE = PLATFORM BUSINESS?
From the perspective of bringing together buyers and sellers in a central marketplace, the financial services industry is arguably the original platform business. After all, matching buyers and sellers is exactly what the stock market, or more specifically, the stock exchanges, were established to do. In this context, most of the financial services industry is simply a collection of the ancillary businesses that support the stock exchange platform business. Apple and Facebook have app makers; the stock market has investment banks and broker-dealers.
Notwithstanding the fact that the stock market is one of the oldest and largest platform businesses, though, there are other platform businesses within the industry that help facilitate interactions (i.e., transactions) between producers and consumers as well.
The real platform opportunity of the future is not an adviser platform, but a financial advice platform.
For instance, custodians and independent broker-dealers serve as a form of platform, facilitating interactions between advisors and their suite of available products. While consumers are the ultimate end-buyers of those financial services products, in this context the custodian or broker-dealer platform is the intermediary between the advisor and the product manufacturer themselves. Thus, just as
Perhaps an even better example of a platform business serving advisors would be Envestnet, which, similar to broker-dealers and custodians, facilitates advisors’ connections with asset managers for various types of investment solutions. What’s notable about Envestnet from the platform perspective, though, is that it doesn’t actually serve as a broker-dealer or custodian at all; in fact, it works with those companies as a technology layer on top, using its technology to facilitate connections between advisors and third-party investment managers.
The end result: Envestnet has
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Notably, though, it’s not the mere presence of technology that establishes a platform, but its ability to perform a matchmaking process. Pure advisor technology platforms — whether planning software platforms like eMoney Advisor, CRM-based platforms like Salesforce Financial Services Cloud or the new FinLife Partners, or portfolio-accounting and investment based platforms like Orion Advisor Services or Morningstar’s Advisor Workstation — may help make advisors more productive, but their ability to add value is contingent on the effectiveness of the advisor’s pipeline business. They cannot naturally scale the way pure platforms can, as technology to augment advisors is still ultimately constrained by the ability of the advisors to grow their own businesses.
A FUTURE IN PLATFORMS?
While custodians, broker-dealers and especially companies like Envestnet function as a form of platform business between advisors and the financial services product manufacturers trying to reach them and their clients, they are not actually platforms that facilitate consumers finding an advisor, where advice itself is the value interaction. But could there ever be an actual advice platform business that matches advisors and consumers, akin to how Uber matches drivers and riders?
Some have actually tried to build such a platform. The closest representation of the model was
Some might suggest that the various robo-advisor solutions are also functioning as platforms, but in reality their managed-accounts solution is far closer to a traditional pipeline business than a platform model. Companies like Betterment and Wealthfront — and while it was still independently owned, FutureAdvisor — ultimately construct their own portfolios, and what they sell to consumers is their automated investment portfolio construction services, produced by the robo-advisor and directly delivered by the robo-advisor.
In turn, this means that robo-advisors must ultimately still
On the other hand, there are a few technology firms that have at least tried to initiate a bona fide form of platform business for at least some aspects of investment management services. Motif is arguably a form of platform business after it pivoted early on from designing its own motifs to allowing others to create them — which means the platform now connects Motif designers to investors who want to buy those motifs, in a relationship that can at least potentially exhibit network-effect benefits as more investors create demand for more motifs, and more motif demand creates more income potential for motif creators, in a virtuous circle.
Similarly, Wealthfront’s predecessor business model
Again, though, even these robo-advisor solutions ultimately are, or at least were, still trying to build platforms to connect consumers with investment managers where the value interaction was portfolio management and investment selection, not more holistic financial advice, and certainly not a matchmaking service to connect to advisors themselves.
CAN PLATFORMS WORK?
Given the potential for a matchmaking platform to connect consumers with advisors, the question arises as to why such a platform hasn’t taken off already.
The question arises as to why such a platform hasn’t taken off already.
Prior advisor matchmaking platforms have seemed to fail because they couldn’t get consumer traction, in a world where
In practice, though, an added difficulty for most advisor matchmaking platforms is the difficulty of matching a consumer to an undifferentiated, generalist advisor. The lack of
The end result? Most matchmaking sites match consumers to advisors based on location, even though an advisor’s ZIP code has no practical relationship to whether the advisor can effectively solve the consumer’s problem.
The few matchmaking sites that tend to do best are the ones that have some kind of differentiating criterion that makes the advisor eligible to be on the platform in the first place. For example, NAPFA only matches consumers to fee-only advisors; the CFP Board only matches to CFP professionals; the Garrett Planning Network provides matches for the middle class looking for hourly advice; and the
Arguably, though, perhaps the biggest failure of prior advisor platform attempts was that they tried to match consumers to an advisor, instead of matching consumers to the advice they sought. Most consumers don’t wake up in the middle of the night saying, “I need a comprehensive financial plan,” or “I’ve got to find a financial planner.” Instead, they wake up sweating a particular financial question, whether it’s “Will I be able to afford to send my kid(s) to college?”, “Am I making the right decision about
In this context, the key value interaction on an advice platform would not be helping consumers locate advisors, per se, but helping them find advisors who can answer their pressing financial questions.
This also helps explain why
In turn, this implies what an advice platform must do well: match consumers with a particular question to the specific advisor who has the expertise to answer that question.
This is, of course, exactly how most other advice platforms operate. While advisors
WHO WILL SUCCEED?
This dynamic of consumers searching for advice, not advisors, suggests that the true advice platform business of the future will most likely be a matchmaking platform between consumers and advisors with various specialties — i.e., niches — that make it easy to identify which advisor is the right match for the consumer’s question.
The key criterion for success will be bringing together a critical mass of advisors who all have specialties individually, but in the aggregate have enough breadth to answer a wide range of consumer questions. In turn, the breadth of answers can attract consumers to the platform to get their questions answered, and the greater demand for advice draws more advisor specialists to the platform, and gives them more opportunities to deliver that advice, in a virtuous circle.
Notably, in a world where the biggest challenge for
After all, while hourly planners commonly charge
Of course, with an ever-growing number of interactions between consumers seeking answers to financial questions, and advisors with niches making themselves available to answer them, the matchmaking function of the platform will become ever more important — especially given that consumers may not always even know what type of specialist/niche advisor they need, with the right expertise, at the right price point.
The platform challenge of designing effective matchmaking algorithms is not unique, though; as Choudary and his co-authors note in “Platform Revolution,” it’s the central challenge that all platforms face as they scale. From Uber and Airbnb to eBay and Match.com, the ability to facilitate appropriate matches is an essential platform role.
Fortunately, though, to the extent that the financial advice platform encourages and drives advisors toward niches, advisors will be easier to match, solving the fundamental problem that exists today: Advisors aren’t differentiated enough to be matched based on anything but their geographic location, which drives up the cost of client acquisition and that of financial advice.
In the long run, solving the matchmaking problem between consumers and advisors can not only make it easier for consumers to get their questions answered, but also make those answers less expensive, too.
So what do you think? Do you think an advisor — or financial advice — matchmaking platform would be viable? Would you participate on such a platform, if you had to actually pick a specialization? Would matching consumers based on their financial questions be more effective than trying to match advisors based on geographic location? Please share your thoughts in the comment section.
