We recently attended two financial advisor conferences where we gave attendees a first look at the platform we’re building. After explaining how Altruist will benefit their business and clients, the number one question we were asked was “Why isn’t anyone else doing this?”

Altruist is the world's first fully digital platform for financial advisors. How could we have possibly come across something that no one else has ever done? The answer isn’t rooted in genius or brilliance. Instead, there’s a far simpler explanation.


The cost of financial advice

Let’s start with a brief review of what it costs to give financial advice. We’ve written in detail on this topic for those interested in learning more. In a nutshell: Registered Investment Advisors (RIAs) need software to run their business. They need portfolio accounting software, CRM, financial planning tools, customer portals, custodians to hold their clients' assets and trade securities – the list goes on. That software costs money. For an RIA managing $25 million, the annual cost could be $15,000. For larger RIAs managing $250 million, that cost could swell to $50,000 a year.

Depending on an RIA’s business model and location, some of these costs can be crippling. And the sad reality is that those that suffer most tend to be clients, who might receive sub-par financial advice by unsavory advisors looking to recoup costs as quickly as possible.

However, the economics of an RIA business change when the advisor’s assets begin to exceed a few billion dollars. Advisors in these ranks start to take significant advantage of soft dollars.

What are Soft Dollars?

Soft Dollars are benefits given by brokers and custodians to investment advisors and managers in exchange for their services. They’re often captured in the phrase “research” and can include benefits such as research reports, access to issuer executives, and payment for expensive data and technology services.

Imagine you’re a $5 billion RIA. You can custody your clients’ assets anywhere. TD, Fidelity, and Schwab will be climbing over each other to convince you to use their platform. How can they sweeten the deal when they’re not technically charging you out of your pocket? Soft Dollars.

One of these custodians will say, “Let us take custody of your client assets and in return, we’ll cover your portfolio accounting software bill.” If you’re at $5 billion, that license fee alone is likely costing you at least $300k each year. Not a bad kickback.

If you’re thinking that sounds like a conflict of interest, you’re right! Unfortunately, all an RIA needs to do is disclose this arrangement in their Form ADV and it becomes completely acceptable.

How does this impact a typical RIA?

For advisors not quite over the billion-dollar mark, you might be thinking who cares, right? If an RIA experiences that kind of success in building their business why shouldn’t they enjoy the fruits of their labor? The problem is that it’s stifling innovation and the true cost is, unfortunately, getting passed down to the average advisor.

Let’s turn the tables and think about it from a different perspective. Imagine you’re a large custodian. You provide a critical service to thousands of RIAs. You know RIAs need software, but you’re also well aware of the dozens of companies already providing these tools. You have two options: You could spend millions of dollars building the software yourself to then charge your RIA clients; or, you could cover the costs of the larger RIA software bills as an incentive for them to use your platform.

If you chose the first option, you’d likely see an exodus of RIAs from your platform because they’d quickly move to another custodian that wasn’t charging them for portfolio accounting software.

If you chose the second option, you’d find yourself enjoying multi-billion dollar RIAs coming to your platform as you help them reduce their overhead. You’re already making 20-30 bps of revenue from every dollar they custody with you, so what’s a few hundred thousand in soft dollars? Chalk it up to the cost of keeping your customers happy — and one that every large custodian bears.

As an advisor, you’re probably realizing that if you’re not in the billion-dollar RIA club, you’re still stuck paying for software licensing and technology fees!

Custodians have no incentive to innovate and build tools for RIAs. Software vendors have no incentive to reduce their fees because they’re getting them fully paid for by the big three custodians. The analogy Jason Wenk, our CEO, likes to use is that it’s like the modern-day mafia: Everyone has an understanding of how business is done and no one wants to challenge the status quo.

If it seems unfair, it is

While the SEC permits soft dollar arrangements as an acceptable conflict of interest as long as they’re disclosed, we don’t think that’s good enough. The long term effect of soft dollars is that hundreds of thousands of RIAs and millions of their clients have unnecessarily paid for software tools and technology costs.


That translates to hundreds of millions of dollars that could have been invested by clients to achieve their financial goals faster or with less risk. And that’s thousands of RIAs that could have helped more clients if they had access to tools that helped them scale their business.

While we’d love to see the practice of soft dollar arrangements amended to actually benefit investors, we realize we can’t change the law. Instead, we can build Altruist.

How we’re different

We don’t think we’re the only ones to stumble on this arrangement. But, we understand why no one else is doing anything about it. For custodians, the money’s too good with the status quo, and for software vendors, fully paid for fees by custodians gives no reason to reduce licensing costs.

That’s why we think it’s time for a change. With Altruist you can avoid dealing with software vendors altogether by using the world’s first fully digital platform for financial advisors. Take advantage of fully digital onboarding and enjoy tools to help you manage and grow your business all while reducing your software costs by more than 90%.

It may sound too good to be true, but the reality is that everyone is just making too much money to care to do anything different.

Let’s change that.

Sunglasses model courtesy of Alex Zepkowski.