When does proprietary tech make sense for RIAs?

Joint research by F2 Strategy and Dynasty Financial explores trade-offs between in-house, all-in-one solutions, or custodial-dependent models

While larger registered investment advisory firms might be able to muster the financial firepower to create their own in-house wealth technology platforms, cost isn’t the only factor to consider when going the DIY route.

That’s one of the main takeaways from a new report that wealthtech consultancy F2 Strategy published in collaboration with Dynasty Financial Partners.

The report, The Big Decision: Selecting a Wealth Platform for your Independent RIA, includes an analysis of nearly 5,000 SEC-registered RIAs, including 38 independent firms that use the Dynasty tech platform.

The research also looked at several technology operating models: a Dynasty-comparable model that includes “elite technology and expert support”; an all-in-one solution model; and custodial-dependent offerings, including pay-to-play and free custodial technology approaches.

According to the report, smaller breakaway practices – those that haven’t broken the $2 billion AUM barrier – will find installing a technology solution akin to Dynasty’s cost-prohibitive, as the initial investment, ongoing vendor management, and talent acquisition make it a “financially unfeasible” proposition.

Between implementing vendor technology and filling in the gaps with in-house technology, F2 Strategy estimates the initial investment could run anywhere from $1 million to $5 million for those smaller firms. Meanwhile, it said the cost of hiring talent to put together a Dynasty-like tech platform would eat up 40 percent of a $300 million firm’s revenue.

For RIAs that have in the neighborhood of $300 million to $1.8 billion in assets, partnering with a provider comparable to Dynasty could have benefits, including the potential for significantly accelerated AUM growth – with a compound annual growth rate of 14.3% over five years for Dynasty firms, in contrast to 6.4% for other comparable RIAs – as well as higher net advisor payouts and loftier firm valuations over time.

“Lower-cost operating models, such as custodial-dependent or all-in-one solutions, offer cost savings but come with trade-offs in terms of scalability, capabilities, and long-term growth potential,” the report said.

Simple custodial-dependent models, it said, often lean heavily on manual data gathering and reporting, which could take away from higher-value activities. Meanwhile, firms using all-in-one platforms such as Envestnet’s Tamarac, Black Diamond, and Orion have to spend time managing internal resources for extended services relating to M&A capital strategies, marketing, compliance, and business growth support.

For RIAs that have breached $2 billion in AUM, the report says building proprietary technology might be feasible assuming they tick off boxes related to their tech road map, their data strategy, and their talent.

“Only when a firm believes it has the resources to effectively address each of these considerations should they embark on a path toward proprietary technology,” the report said.