Advisors are facing a pricing evolution for AI services and software, similar to that of the changing subscription models for Netflix and Disney: The more you use it, the more you have to pay.
And the more alternative options available, the harder it is to balance overall costs.
Part of the change is driven by AI-powered advancements in cloud services, as delivered via providers like Google and Microsoft. Advisors are paying software providers based on data usage in the cloud rather than a fixed-price licensing fee or a fee per account or assets under management. With usage-based pricing, the cost by the software as a service (SaaS) provider increases as your data usage goes up.
"Some SaaS firms are trying usage-based pricing in the market in order to protect themselves from increasing usage based costs from their Cloud providers and to protect themselves in multiyear agreements," said John O'Connell, founder and CEO of The Oasis Group, a software provider for wealth managers and financial technology firms based in Monroe Township, New Jersey. "I believe that we will see an increase in usage based pricing models in the wealth technology space."
Google announced on April 9 a new Arm-based central processor,
"There's a trend around consumption-based pricing that you'll start to see the industry talking more about," said Michelle Feinstein, general manager and vice president of global financial services at cloud-based Salesforce in San Francisco.
Salesforce has shifted more into a usage-based pricing in the cloud. The customer relationship management (CRM) software provider also raised fees starting around $25 per user, per month for its Sales Cloud and Service Cloud platforms, reaching as high as $500 per user, per month. But each type of service and usage has a different cost structure.
"Historically, Salesforce has always done a license [fee] and per-seat type of licensing," Feinstein said. "But as we're heading into this AI world, we're starting to move more toward looking at allowing customers to have a pricing model where they look at tiers of usage and look at what they might consume in the data cloud."
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Shifting more into usage-based pricing is not a bad thing, O'Connell said. It's actually needed to balance the rising costs that software providers face in the cloud ecosphere.
"SaaS software companies have a variable cost structure based on computing power and storage costs that they pay to their cloud hosting providers, such as Amazon, Google and Oracle," O'Connell said. "They need to build those variable costs into their pricing with other costs related to software development, such as people and long-term research and development costs."
The price to play in AI is a complex balancing act for advisors
But that also means advisors have to balance their costs. And it's not just a shift to usage-based pricing — advisors are having to adjust to a combination of different cost structures. Firms still pay service costs based on licensing and access to APIs, or a fee based on the number of advisors, accounts or assets under management (AUM) that increases as the firm grows.
"As technologies merge, we see a blended structure becoming the most common pricing model," said Adrian Johnstone, CEO of Practifi, a CRM technology for advisory firms based in Chicago. "RIAs rightly want the fees of technology providers to scale with the value they create and a blended structure will deliver that."
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Though most advisors agree that AI technologies do create greater workflow efficiencies, buying into any AI technology costs more, especially as it develops further. Just look at the latest
"Most wealth management firms, and especially the enterprise RIAs and broker-dealers that we work with, want consistency in their software expenses for budgeting. Usage-based pricing destroys this, since it means you can have wildly different bills month to month," said Craig Iskowitz, founder and CEO of Ezra Group, a wealthtech consultant based in Cherry Hill, New Jersey.
Iskowitz added that the software providers attempting to differentiate themselves through pricing are at greater risk of failure.
"If your product isn't the best in its category or isn't differentiated somehow from your competitors, then no one will care about your pricing," he said. "You could give it away for free and still no one would use it."
