How advisers can really make tech pay off

Financial advisers often equate technology with progress. And while it can be one of the major keys to unlocking profitability, it also can be responsible for strangling and stifling your firm.

Executives at several firms that have grown large and profitable said the key is recognizing when technology begins to inhibit rather than foster growth, and then putting a plan in place to take not just the technology to the next level, but work flow processes and people, as well.

A case in point is Clarfeld Financial Advisors Inc.

Anthony Schembri, managing director, is in the final stages of a 17-month tech odyssey.

The firm started business in 1981, predominantly as an accounting firm with a handful of employees. It now has a staff of 75, almost 400 investment management clients and manages $3 billion in assets.

Mr. Schembri was put in charge of updating the firm’s technology and reducing the 25 different systems used by various business units in the firm (accounting, cash management, investment management, financial planning, insurance, etc.) to something more manageable and, more importantly, more efficient.

Over the course of the past year and a half, he evaluated many systems and decided to adopt a highly customized version of Salesforce.com.

“We did not want to spend the money for Salesforce and get just a glorified Rolodex. We needed to bake into it all the work flows we had been developing, work flows that heretofore were not built into our systems,” Mr. Schembri said.

“If we want to know when all the insurance premiums across the firm are due for clients this month or manage and generate a report, say, on [individual retirement account] distributions for a year, we will be able to do that on one system,” he said. “Those all used to be on disparate ones.”

CLEANING HOUSE

More and more growing firms are adopting this kind of thinking, planning and implementation.

The InvestmentNews Adviser Solutions 2011 RIA Technology Study, published last month, found that 71% of the registered investment advisory firm respondents were close to reaching the threshold for assets under management or number of clients at which time their tech systems will need to be revisited and upgraded.

Further, 65% of the respondents have exceeded the $200 million in assets under management threshold, and 42% of those approaching their size threshold anticipate reaching it in the next 12 months.

“We found that RIAs with at least $200 million in AUM are heavily reliant on integration to realize greater efficiency and improved productivity within their firm — 81% of these firms reported that they rely on heavily integrated systems,” said IN Adviser Solutions senior research analyst Jeff Pierce.

Rich Gill is vice president of business development at Focus Financial Partners LLC, a partnership of 20 independent advisory firms that together manage $40 billion in assets.

He gets to see how many of these metrics play out among the firms within the partnership and often weighs in on matters of tech research, selection and rollout.

“There are few times that I come in [to one of our firms or a prospective one] with my team where we can’t find improvements needed in terms of efficiency. A lot of that has to do with legacy technology and thinking,” Mr. Gill said.

“As bitter a pill as it might be to swallow, there are always points where we can replace people … with technology,” he said.

Mr. Gill referred to the tech renaissance that began in 2002 and 2003, during which some of the first computerized advisory platforms came on the market. Prior to that, every process was more or less personnel-centric and manual.

RIP OUT AND REPLACE

Now, with the variety of platforms available, firms, especially custodians and large broker-dealers, need to take a closer look at what they can rip out and replace to become more efficient, Mr. Gill said.

In his own experience, he said that there are really two milestones: one reached at the $300 million AUM mark and the other at $1 billion.

Newly minted breakaways setting up their own RIAs have it easiest, thanks to their clean slate in terms of technology, Mr. Gill said.

“The breakaway firms we deal with … are very likely to become highly efficient firms” because they can select from many different, almost pre-built platforms at custodians or from firms such as Tamarac Inc., which offers its own completely custodian-agnostic platform, he said.

Mr. Gill referred to a Connecticut-based firm in the partnership that was set up in 1985. Its founders chose to keep the staff as small as possible and rely heavily on technology instead. Now the firm has only nine staff members and $800 million in assets under management.

“They insisted that their technology do these things from the start,” Mr. Gill said. “Specifically, [they] did not rely on people to fix things or carry out daily reconciliation, whereas if you look at an equivalently sized firm that started at the same time, I can almost guarantee you they have 20 people.”

Even so, most firms confront issues of growth and tech efficiency in a more evolutionary way.

Another route taken by some is to merge firms.

That process allowed Greg Friedman, an adviser and principal of wealth management firm Private Ocean, to take a hard look at the structure and systems that his combined firm had in place.

His situation is perhaps more interesting and potentially useful for fellow advisers because he also is the founder of CRM Software Inc., which makes the popular Junxure customer relationship management software.

An eye-opener for Mr. Friedman and his partner was the process of implementing a re-balancing system. In this case, it was the venerable iRebal application now owned by TD Ameritrade Institutional.

CRITICAL MASS

Pre-merger, Mr. Friedman’s and his partner’s firms were too small to realize significant efficiency gains from the use of re-balancing technology. But now, with combined assets under management of $750 million and aspirations of hitting $1 billion in the next year or two, Mr. Friedman has come to think that re-balancing will hold the key.

“We will be able to achieve that without hiring another person,” he said.

In fact, Mr. Friedman said he thinks the solution is likely to prove even more efficient and profitable than initially thought.

“Our initial target was to manage 60% to 65% of our portfolios with the re-balancer,” he said, adding that conventional wisdom for several years has been that simpler instruments such as mutual funds could be managed easily in this more automated fashion.

However, with improvements in the technology in the past few years, and with the in-house expertise of a meticulous investment management staff member, Mr. Friedman expects that the technology will be able to take up even more slack.

“I foresee more than 80% to 90% of the portfolios managed with the re-balancer,” Mr. Friedman said.

Although no particular technology, process or set of work flows are right for every firm, careful analysis of how these factors interact should reveal what an adviser needs to know about his or her efficiency.

Such analysis then can be applied to finding better technology to retrofit key systems an adviser already has, or to deciding to replace components that are inefficient or outdated.

Seeking insight outside the firm can be fruitful because third parties, especially efficiency and tech experts knowledgeable in the areas of RIA business and operations, likely will recognize inefficiencies that you overlooked.

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