Technology's impact on firm value

Catch the eye of buyers with software for integrated work flow and automation

Mar 16, 2014 @ 12:01 am

By Joyce Hanson

succession planning, technology, integration, work flow, automation
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Making a firm more valuable prior to sale ranks as a top priority of advisers involved in succession planning. Yet in the push to gain more clients and increase assets under management, technology as a value driver can often get lost in the shuffle.

D. Scott McLeod, president and chief executive of Brown Financial Advisory, learned this lesson the hard way. He took over the five-employee firm in January 2011 and realized that while the business was profitable, there was little capacity for additional growth due to the technology gaps and outdated systems.

It was only when Mr. McLeod saw Brown Financial's customer relationship management and portfolio accounting systems in action that he realized exactly what technology issues needed fixing.

Over the last three years, Mr. McLeod has switched the firm's CRM to integration-friendly from Pro Tracker, retrained staff on Schwab Performance Technologies' automated PortfolioCenter accounting software and replaced Schwab's portfolio re-balancing software with a scalable web-based re-balancing product from TradeWarrrior Inc.

“They worked fine for the business at the time, and it was profitable. But when I came in, I realized we had limited upside without adding people, technology or both,” he said. “The capacity issue of not being scalable prevented me from marketing and acquiring new clients because the efficiencies weren't there to allow me to be out of the office as much as I'd like to be.”

Advisers who incorporate technology trends ahead of a sale — including the two big trends of integrated work flow and automation of back-office processes — can anticipate higher price tags for their business as they exit.

“Fully integrated, scalable firms in the cloud are more valuable,” Mr. McLeod said. “If you intend to grow a business, you have to have those elements in place. There's no way around it.”


Integrated work flows should start with a company-written operations manual that lays out all work processes so the new owner knows how business gets done, according to Lauren Lindsay, director of financial planning at Personal Financial Advisors.

“An updated CRM and scanned documents are crucial,” she said.

Michael Laks, financial program strategist for document storage and management firm Laserfiche, noted that a well-documented work flow process should encompass regularly performed tasks such as new-account openings, portfolio re-balancing, quarterly reporting and compliance functions.

“You can see where the doc came in, who touched it and where it goes for the next step,” Mr. Laks said. “Anyone who comes into the business after it's transferred can step in and start doing their job right away because the processes are automated.”

Advisory firms use content management technology, such as that offered by Docupace Technologies Inc., Laser App Software Inc., Laserfiche and Redtail Technology Inc., to automate back-office processes. These software systems provide secure and compliant electronic processes that organize and route information while limiting exposure to civil and criminal liability.


Investing in content management software can save small registered investment advisers $48,000 a year in operational costs, and larger firms as much as $360,000, according to a white paper published by Laserfiche and RIA consultant Nexus Strategy. That translates into an increased business valuation of as much as $242,000 for small firms and $3.6 million for large firms, the white paper said.

Integrating content management with CRM is the most efficient use of the software, according to the white paper, which cites CRM systems such as Junxure, Redtail, Tamarac and Salesforce.

Nexus Strategy's president, Tim Welsh, said firms that deploy content management technology can save as much as 9% of revenue. For example, he said, a firm with $1 million in revenue saves $90,000 by using back-office automation to pay lower overhead, store less paper and employ fewer administrative employees.

“That's why technology can have a massive impact on the value that firms can get when they sell,” Mr. Welsh said.

Record keeping is another succession-planning issue that can be resolved by the cloud-based digital organization that automation offers, he said.

“The only real asset in an advisory firm is the good will of the client base — the good will that the clients will stick around,” Mr. Welsh said. “You need to have really good client records that are organized and not in somebody's Bankers Box in their garage.”


Greg Friedman, co-founder and chief executive of Private Ocean, which has $850 million in assets under management, has put in motion an orderly, years-long succession plan to sell his business to the firm's 24 employees. Mr. Friedman, who is also president and CEO of the Junxure CRM system, believes an advisory firm's value is increased when its CRM and database are robust.

“The reason you use this technology is either to increase your service model to your clients or to increase profitability,” Mr. Friedman said. And “it flat-out increases the value of your business to a third party whether in a merger or a sale.”

One danger zone worth considering prior to a sale is noncompatible technologies, said Eve Kaplan, founder of Kaplan Financial Advisors, who has a legally binding, annually renewable succession agreement with a fellow fee-only adviser.

“Some of our technology, planning and reporting systems are identical (portfolio reporting, financial planning), but some are very different (re-balancing software, custodians),” she wrote in an e-mail. “Despite the efficiency of our systems to our respective practices, it would require time and effort to integrate our practices, due to these technology barriers.”

In addition, Mr. McLeod warns that the age of a firm's technology can be an issue. A couple of years after taking over Brown Financial Advisory, he said, he was forced to replace the firm's server as well as some outdated computers because technology changes so quickly.

“The biggest thing [for buyers] is to not be afraid to ask the tough questions about technology and how it's being used inside the firm, and to use those answers as part of the valuation discussion,” Mr. McLeod said.


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