The financial advisor business has long used various formulas to allocate and split up the revenue associated with a (new) client. In the "old" days, the rough rule of thumb was a 25/25/25/25 split between whoever was able to Find them (i.e., sourced the prospect), Bind them (i.e., get the prospect to sign and become a client), Mind them (i.e., provide the service), and Grind them (i.e., do the administrative paperwork grind).
For an advisory firm that otherwise ran a 20% profit margin – which meant the Find/Bind/Mind/Grind was carving up the other 80% of the revenue – this effectively resulted in the advisory business spending 40% of revenue on the advisors who brought in the clients (Find and Bind them), and 40% on overhead (Mind the clients and Grind the work). Which early practice management consultants like Mark Tibergien dubbed the 40/40/20 rule (40% direct expenses to advisors, 40% overhead, and 20% profit margins), as highlighted in his seminal book, "How to Value, Buy, or Sell a Financial Advisory Practice".
Notably, though, these "rules of thumb" (though in reality, they weren't just rules of thumb, they were very much substantiated as reality by the benchmarking studies that Mark Tibergien and Moss Adams were running in the 1990s and 2000s), were built in an era where a "large" advisory firm had $100M of assets, and a "mega" firm was trying to grow to $1B of AUM. As advisory firms have grown far larger over the past several decades, where large firms may now have billions of AUM and mega firms have 10s and are growing towards $100+ billion in assets, the race has been on to leverage ever-larger firm sizes to create economies of scale that would allow advisory firm margins to expand.
In the decade of the 2010s, this thesis largely played out through the efforts of various "aggregators" that sought to bring together multiple advisory firms with duplicative overhead, obtain cost synergies by reducing the redundancies, and taking advantage of their size to make the fixed overhead expenses it takes to run an advisory firm a smaller percentage of overall revenue… in essence, aiming to shrink those overhead expenses as a percentage of revenue down from 40% to 35% or 30% of revenue, in a path to margin improvement through scaling.
More recently, though, the focus has shifted from pursuing economies of scale by allocating fixed overhead staff and expenses across a larger base of advisors, and instead by developing more internal or proprietary technology that aims to just eliminate a portion of overhead staff altogether. Which has only amplified further in the emerging age of AI, which both reduces the barriers to entry for firms to develop their own technology to improve operational efficiencies, and the hopes that agentic AI will be able to handle more complex operational tasks that can truly result in a replacement of human staff members with fixed-cost software instead.
And so it's notable that this month, a new advisor startup named Arca emerged from "stealth mode" with a fresh $48.5M capital raise, while existing tech-enabled advisor roll-up Farther announced a new $150M capital round to further its own serial acquisitions of advisory firms, as both firms aim to capitalize on the potential of building their own (AI-driven) proprietary software to lift their productivity and operate at better margins than "traditional" advisory firms.
From the advisor perspective, the potential for any technology to make advisors more efficient is appealing; advisors are the most expensive cost in an advisory firm so any productivity improvements can quickly drop to the bottom line, and our own Kitces Research on Advisor Wellbeing reflects how strongly most advisors dislike having lots of administrative and compliance tasks or being stuck with ineffective technology, which means building better proprietary technology can also improve advisor retention. And when the average advisor rates the components of their technology stack higher than their advisor tech stack as a whole (due to the challenges of integration across so many technology components), there is clearly room for improvement.
Yet from the broader industry perspective, one of the most perplexing challenges of the scaling advisory business is the sheer lack of any economies of scale to appear in the overhead costs of running the business. As a result, while the median overhead expense ratio of advisory firm was 40% more than 20 years ago, the latest Investment News industry benchmarking study found that amongst "large" firms with an average of $26M of revenue (more than 10X the firms of old), the median overhead expenses were… 42% of revenue! Which means that two decades of the emergence of the internet, the shift to cloud-based software, the rise of "robo" and business process automation, and now the past several years of AI-enabled technology, have resulted in absolutely no improvement in overhead efficiency! In fact, the irony is that the only profitability improvements in advisory firms appear to have come from a reduction in the percentage of revenue going to advisor compensation… which is more likely a function of proprietary technology making it harder for advisors to leave and take clients, and aggregators deploying dollars for acquisitions that are tied to restrictive employment agreements (which also makes it harder for advisors to leave and take clients), than actual improvements in productivity?
Ultimately, it's possible that the robustness of the 40% overhead costs of running an advisory business are simply because we haven't invested enough yet into proprietary technology, such that the rising level of engineering talent coming into advisory firms, coupled with record flows of investor capital (with deals like Arca and Farther, and similar tech-enabled-roll-up competitors like Savvy and Compound), will eventually find a way to break the trend. Yet even then, additional questions arise: if independent AdvisorTech vendors can amortize tech development costs across thousands or even tens of thousands of advisors (the user counts at leading vendors in the major AdvisorTech categories), can any proprietary platform really develop superior software and effectively compete in most or all of the major AdvisorTech categories at once? For the time being, investors are still betting that a breakthrough is looming, where AI will either create new capabilities (that independent tech vendors can't replicate across a disparate tech stack), or enable faster and lower cost development (to allow proprietary platforms to remain competitive)… but time will tell whether the latest crop of tech-enabled advisor roll-ups can really drive better margins through operational efficiencies, or if in the end the primary beneficiaries of industry technology improvements are the consumers who benefit from better quality advice but not necessarily reflected in the margins of advisory firms that must continuously reinvest to stay competitive?
This article first appeared on the Nerd’s Eye View at Kitces.com at https://kitc.es/advisortech-july2026, and has been reprinted here with permission.
Ben Henry-Moreland
Ben Henry-Moreland is a Senior Financial Planning Nerd at Kitces.com, where he specializes in writing and speaking on financial planning topics including tax, practice management, and technology. He also co-authors the monthly Kitces #AdvisorTech column. Drawing from his experience as a financial planner and a solo advisory firm owner, Ben is passionate about fulfilling the site’s mission of making financial advicers better and more successful.
Michael Kitces
Michael Kitces is Head of Planning Strategy at Focus Partners Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Focus Partners Advisor Solutions, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.
In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.
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