First published on wealthmanagement.com

By all accounts, the current list of fintech firms serving wealth management firms has exploded over the last decade. One glimpse at Michael Kitces’ fintech map is sufficient proof that we live in a world of near paralyzing choice. Need a financial planning tool?  Over 20 are available to pick from.  Need a CRM?  You can pick from over a dozen. The competition in the fintech market is good for advisors, clients and the future of our industry.  It allows us exceed client expectations at lower costs.  But this windfall has always come with an underlying risk which may become more visible in the months to come:  Not all of these firms are going to make it through a prolonged recession.  

Not All Fintech Foundations Are the Same

To understand this risk, it’s important to understand how fintech firms start, who starts them and how they remain relevant—none of which I’m going to tell you in this article. If curious, just google ‘How to start a fintech company’ and you can see for yourself. Spoiler alert: You apparently don’t need to know much about our industry to start one.

Further risk comes from how firms are initially funded and then rely upon incremental venture investment to keep pace with growth. With 10+ years of incremental spending by all financial services firms on technology, this was never a significant issue.  Demand kept pace with supply.  However, a prolonged pull-back in spending will leave many new firms scrambling to stay independent, maintain their growth or remain open at all. For wealth firms that rely upon smaller tech vendors for critical day-to-day functions, disruptions in this market could have some painful consequences.

The good news here is that, with a bit of thought and careful planning, many of these issues can be avoided.

Know Your Vendors

One of the best resources we have found is crunchbase.com. A website that tracks deals, deal makers and lifts the lid on who is backing that firm you just demoed.  Ideally, you’ve done this before signing a contract or subscribing to a new software offering, but it’s still a good idea to do some research on firms you’ve had in house for a while.  Alternately, you can ask the company themselves, but few are really excited to offer these details up.  You’ll also get the rosiest picture possible, so take whatever is shared with a grain of salt.  For the best insight into overall health of a firm you can ask for their audited financial statements, but that’s even more difficult to obtain these days. Even well-funded, well-known fintech firms stop short of this type of request.

What to Ask?

As a client relying on software to support your business, you should have answers to the following questions for all your tech providers.  If you do not know these answers, it’s time to start making a contingency plan:

  1. How much capital do they have to work with, how much is committed and how tied are they to additional external investment? This will give you a good sense of whether the firm may struggle in the months ahead if growth stalls while additional funding rounds stall.
  2. What’s the intended outcome of any investors?  Many firms are initially funded by companies that will push for rapid growth and re-capitalization within the first few years of investment. It’s not hard to find this information, and while nobody is going to tell you they’re going to push for an exit, the history of their other deals should give you a sense of what will happen.
  3. How much experience does the fintech founder have in growing and maintaining a business you rely on?  Does she have a track record of spinning up firms and selling them to larger software aggregators?  If so, you better be comfortable with your hot new tool someday being purchased and suffocated by the larger tech aggregation players.

In the end, you’re likely to get an opaque picture of where the firm is, where it’s likely to go and how that will impact you. But you may be surprised by what you find, and that insight will be valuable as you start to make decisions in the future.

How to Protect Yourself

We recommend taking some steps to prepare for reacting to potential software disruptions:

  1. Look across your current tech vendors and ensure that risks are highlighted, and contingency plans are in place if those firms implode.
  2. Make sure you have access to the data within those tools and have a workaround in place if needed.
  3. An alternative to the ‘duck and cover’ approach is to consider becoming an equity partner of the fintech firms you’re working with—especially if you find yourself relying heavily on a firm that may not be on solid ground. Many smaller tech firms would far rather take investments from end clients than from the VC community.  By directly investing in your tech vendor, you can help ensure it continues to provide the services you depend on.  It can also ensure you have a bigger hand in prioritizing future enhancements.

Knowledge is power and having answers to some of these questions will help guide you toward making better decisions in the future.  Our hope is that the current fintech ecosystem remains strong, healthy and enables even more diversity of offering to advisors in the future.  Our industry needs more completive offerings if we are going to catch up with the expectations of our clients.  However, we can expect that some of the firms we use today will not make it through a prolonged downturn and advanced planning will be critical to minimizing its impact.