When technology or outsourcing can help, and when it can’t

Outsourcing to investment advisers can mean anything from transferring responsibility for the entire process of client service to using outside services to handle only specific areas, such as investment strategy, back-office functions or portfolio management.
Advisers tend to be reluctant to either outsource or use technology for what they believe is a core function of their service model.
What’s more, the definition of “core function” differs for each adviser. For most, internal tasks such as payroll, tax preparation and website maintenance are not considered core functions. These tasks are easily and readily outsourced.
Certain advisory duties are also treated as noncore by most advisers. These can include downloads, reconciliations, client billing and reporting.
Core functions tend to be defined as those advisory duties that directly affect portfolio management such as financial planning, investment model construction and rebalancing.
For any of these functions, advisers have three options: do-it-yourself, use technology or outsource. Those who choose the do-it-yourself path for everything typically believe one or more of the following:
• No software or outsourcing service can do as well as an adviser.
• Personalized service flies out the window if you use software or outsourcing.
• Software and outsourcing services are expensive.
None of these beliefs is true.
High-quality software and outsourcing can do as well — or better — than an adviser using spreadsheets or manual methods. Since both software and outsourcing act only on input from the adviser, the output can be customized to the adviser and clients. And automated or outsourced processes can enhance quality control. Finally, can anything be called expensive if it helps efficiency, saves more labor dollars than it costs and allows for greater revenue without increasing overhead?
(More: Running an advisory practice in the age of the robo-adviser)
The question should not be whether or not to use technology and outsourcing services. The more relevant question is, “When is it appropriate to use technology vs. outsourcing?” In my opinion, the following guidelines apply:
• If the technology can be used by many people in the company, does not require a big learning curve, and does not involve significant time, then technology alone should be fine. For example, if portfolio-accounting software can produce client reports in a few hours each quarter and the software is intuitive, there is no need to outsource.
• If the technology is complex and requires significant experience and time, then outsourcing should be considered. For example, asset allocation software can be difficult to implement and typically takes time and effort to develop efficient models. Outsourcing to an experienced company can save time and money while also adding another layer of expertise.
• If the technology/outsourcing comparison is not clear cut, then more factors must be considered. For example, if downloading and reconciling accounts daily can be done as part of one employee’s duties, what happens when new business causes volume to increase? Can you allocate 20% of an employee’s time and then move up to 40% when the time comes? Outsourcing might make sense to obtain the flexibility to use only what you need at the time. Or let’s say you outsource manual entry of outside account data every other week. As volume increases, account aggregation software can provide the advantages of lower costs and daily updates.
Of course, no choice is permanent. For any given task, you can switch from outsourcing to technology and vice versa based on current circumstances.
In today’s world of competition and complexity, advisers need to focus their efforts on “mission critical” functions such as meeting with clients, marketing or developing strategies, rather than tasks that can be delegated to a computer or outside company. Technology and outsourcing can be the key to greater success.

Sheryl Rowling is chief executive of Total Rebalance Expert and principal at Rowling & Associates. She considers herself a nontechie user of technology.