The Fortigent-LPL Financial deal delivers benefits to both firms, but also underscores how difficult it can be to succeed in providing high quality performance reporting, data, manager search and due diligence services to wealth managers with demanding high-end clients, according to industry experts.

The benefits of last week’s blockbuster acquisition of outsource provider Fortigent by independent brokerage powerhouse LPL Financial to the two firms and the entire outsourcing business have been well documented. But the acquisition also underscores how difficult it can be to succeed in providing high quality performance reporting, data, manager search and due diligence services to wealth managers with demanding high-end clients, according to industry experts.

The fact that Fortigent opted to sell out to LPL in the first place is indicative of how hard it is to make a profit as a high-end outsource provider, some industry executives argue. In addition, they say, outsourcing firms catering to large wealth managers, family offices and private banks also face major challenges funding their capital needs and keeping pace with technology and marketing requirements.

“Look, Fortigent is a great company, and certainly one of the best in the business at what they do,” said Jeff Spears, chief executive of Sanctuary Wealth Services, a San Francisco-based Fortigent client and business support platform for breakaway advisors. “But I think the deal shows that being an outsource provider for the ultra-high-net-worth market doesn’t work, at least not without a lot of help. Fortigent has a great reputation, but it took them ten years to get there, and they still needed outside cash and stability to get to the next level.

“I think Fortigent’s strategy proved to be more expensive than they thought,” Spears continued, “and I think it demonstrates that focusing only on the high-end, which demands a lot of customization, is not sustainable.”

“It’s still a very fragmented market and can be difficult to get traction,” agreed industry consultant Tim Welsh, president of Nexus Strategy, of Larkspur, CA. “It took Fortigent ten years to get to $50 billion and they’re a really good company, so it can be a long, slow process, which means you’ll probably see more deals and private equity and venture capital companies looking at the space.”

Capital needs increasing

In fact, the need for capital will only become more pronounced, according to industry executives.

“This is a very expensive business to operate,” said Bill Crager, president of Chicago-based Envestnet, one of the industry’s leading outsourcing firms with $127 billion in assets. “You’re looking to replicate the infrastructure of huge wirehouses, but it’s for thousands of different advisors in hundreds of different environments with dozens of different clearing partners.”

Outsourcing companies also face a constant threat from new technology entering the market.

“It’s a tech-intensive business,” said San Francisco-based consultant David DeVoe, who until last year headed Charles Schwab’s Advisor Services division. “New players can capitalize on emerging technology, and there’s always a chance that someone can come in as a game-changer.”

Indeed, Spears says he’s often approached by software entrepreneurs in the Bay Area. “Believe me, there are a lot of people in Silicon Valley right now who are trying to create new outsourcing solutions,” he said.

Outsourcing companies also face the not inconsiderable challenge of marketing and branding, according to industry experts.

Low hanging fruit?    

At first glance, the fast-growing market may be seen to still have plenty of low-hanging fruit. For example, Robert Fiore, president and chief executive of Wilton, CT-based Private Client Resources, which services over $60 billion in assets, estimates that only 30 per cent of advisors currently use outsourcers for reporting and data aggregation.

But Fiore points out that in addition to building out infrastructure, new entrants to the industry face a substantial learning curve when it comes to understanding a complicated business and building relationships.

And Elmer Rich, principal of Rich and Co, the Chicago-based marketing consulting firm for financial services companies, points out that while 70 per cent may seem to be a big piece of the pie still unclaimed, “the incremental costs to convert that market share could be very expensive.”

“This is a business with no tech barriers,” Rich said. “So distribution at the point of sale is critical and whoever has the most wins. But it’s very time-consuming and takes a lot of work to get in front of advisors and then get them to buy in. It’s a hyper-competitive business, and it’s really hard to differentiate yourself.”