How the top RIAs firms are leveraging technology

Top-performing adivsory firms tend to employ fewer staff members, keep a lid on salaries and are more productive — largely as a result of wringing every bit of efficiency out of their technology, according to InvestmentNews' RIA Technology Study, to be published later this month

Top-performing adivsory firms tend to employ fewer staff members, keep a lid on salaries and are more productive — largely as a result of wringing every bit of efficiency out of their technology, according to InvestmentNews’ RIA Technology Study, to be published later this month.

As a percentage of their revenue, top-performing firms are spending 5% to 6% annually on software, hardware, consulting and outsourcing, the study found. The average spending among all 120 firms that participated stood at 5.5% for both 2009 and 2010, but is expected to increase to 6.4% this year.

“Although technology is the third-largest expense behind human capital and office occupancy costs, we were surprised that there wasn’t more of an investment, given the positive impact technology has on firm profitability and growth,” said Kelli Cruz, InvestmentNews’ director of custom research. “Given the rate at which new technology is being introduced, we expect to see technology spending increase.”

Research results and interviews indicated that the most successful firms were not necessarily purchasing the most-cutting-edge technology, but using the technology they had in the most efficient manner.

When asked what their top considerations were when investing in technology, 50% of firms cited productivity gains as the top reason. At a distant second, 18.5% of the firms cited an expected benefit to the client. That was followed by increased profitability (10.2%), expected cost (9.3%) and more time available to focus on business development activities (6.5%).

(Listen to the archive of the May 5 webcast, Key Findings of the InvestmentNews RIA Technology Study, or read an excerpt of the transcript.)

Fifty percent of the top-performing firms (defined as the top 25% of respondent firms based on a composite score of profitability, productivity and three-year revenue growth) reported spending more than their historical run rate on technology; 48% plan on doing so in 2011.

Other interesting differentiators among those top-performers and other firms are their areas of projected technology spending. For example, 17% of the top firms plan to invest in additional training for staff members in 2011, compared with only 6% of the others.

In addition, 92% of the top firms plan to invest in new software in 2011, while just 66% of the other firms will do so.

On the other hand, projected spending on new hardware and IT consulting is close to the same in both groups (42% versus 43% on hardware and 25% versus 26% on consulting).

With major technology initiatives launched at two of the largest custodians — Schwab Institutional and TD Ameritrade Institutional — as well as continuing investments at Fidelity Institutional Wealth Services and Pershing Advisor Solutions LLC, InvestmentNews wanted to assess the interest level among advisers.

According to the study, 82% of the respondents reported using at least a portion of their custodian’s technology platform, and 67% rated the offering as above average or outstanding.

When asked whether the latest set of technology-based initiatives at the larger custodians would have an effect on their practice, 72% re-ported that they expected a “material impact,” while 28% felt there would be little to no impact. That indicates that almost 30% of advisory firms will continue to invest heavily in independent third-party providers rather that tie themselves to a particular custodial platform.

MAKING LIFE EASIER

A full third of respondents reported relying on applications being delivered over the Internet. Forty-four percent of respondents using cloud-based services reported they do so because of the ease of technology management (they no longer have to maintain software themselves on premises, or the requisite hardware, or pay consultants to do so), while 17% reported making the move to lower their overall technology costs. Respondents also noted the increased effectiveness, adaptability and speed such a change represented.

Other reasons that respondents gave for using cloud computing included that it represents a viable solution for their disaster recovery plans, that it assists firms in becoming and maintaining a paperless office and that it is simply the only way that certain applications are being delivered by providers.

The need for system integration in technology offerings remains a huge hurdle for advisory firms.

While respondents could select multiple answers to the question of what the largest obstacles were in the selection of integration technology, an astonishing 53% of them selected “unable to identify an appropriate solution.”

“Insufficient staff time for developing an integration plan” was selected by 34% of the respondents, while 19% cited a “lack of internal resources for investing in, and maintaining, a solution.”

Only 41% of the advisory firms surveyed are including system integration as part of their purchase decision when seeking new technology. This suggests that much of the best-of-breed technology that firms rely on is not well-integrated yet.

Firms that are using integrated technology cited greater efficiency of process (36%) and improved productivity in general (31%) as their reasons for doing so.

E-mail Davis D. Janowski at [email protected].