Technology and work flow: Keystones in valuing a firm

When reliable and repeatable processes are in place, a succession plan is easier and more profitable

Jun 12, 2013 @ 12:01 am

By Davis Janowski

Little unbiased research exists to support the notion that any particular category of technology will make your practice more valuable than another.

There is some research, however, suggesting that firms taking a more technology-driven approach tend to have an easier go at succession. That is one of the key findings of the recently published InvestmentNews 2013 Adviser Technology Study.

Simply put, the InvestmentNews Research Group found that firms committed to technology generally deliver better results when it comes to generation of revenue, efficiency and thereby profit. Referred to as “innovators” in the study, these firms are identified and grouped based on the number of software categories they employ in their practices, the overall number of integrations between those categories and their reliance on cloud-based technology and mobile applications.

These innovator firms generate more revenue, handle more clients and accounts, and generate higher levels of income and earnings than all other advisory firms. Various longtime advisers and experts in the advisory industry interviewed for this story agree with the findings.

What they did add though, is that the ease with which another person can step in and run a firm essentially from Day One is extremely valuable when it comes to succession. In other words, those firms taking a holistic approach to their practices and putting organized, repeatable processes in place can be almost as important as technology — and at the very least an essential first step in preparing for succession.

“If a firm is going to have enterprise value, it has to have real value,” said Rich Gill, a managing director for Focus Financial Partners LLC, who works on tech and operations issues facing the independent adviser partner firms within Focus.

As Focus is a strategic-acquisition firm, much of Mr. Gill's work includes assessing registered investment adviser firms as potential partners.

“If you have your little practice and have never put in real infrastructure or processes, there is really no enterprise value; it is really a sole proprietorship. Where value comes in is practices — repeatable processes that someone else could actually use,” he said.

Greg Friedman, founder and chief executive of the Private Ocean, a West Coast RIA, argues that this is more important than any argument over exactly what types of technology one might have in place.

“The important part is, do you have systems at all? It is not about arguments over on-premises or cloud-based. It is about your firm being organized; that is first and foremost,” he said.

Private Ocean is an interesting example because it was born out of a merger between two firms four years ago. That is when two of the San Francisco Bay Area's largest independent investment advisories, Salient Wealth Management LLC and Friedman & Associates tied the knot. The combined firm now has $775 million in assets under management and tends to target clients with at least $2 million in investible assets.

Supporting such a client base does, in fact, require a lot of technology — and technology that is well-integrated.

And Mr. Friedman's firm makes a compelling example for another reason. He is also the co-founder of the small technology company behind one of the industry's most popular customer relationship management systems: Junxure.

“Being electronic is the next quantum leap — electronic systems that are being utilized and that are capturing good data,” Mr. Friedman said. “This can have a tremendous impact on your firm's valuation.”

The term for this modern-day convergence of repeatable processes meeting technology is "work flow." At their most sophisticated, work flows combine human work with technology automation, but they can be as simple as a binder with printed pages and process instructions.

While their particular use among RIA firms has not yet been quantified, the superior approach from a technology perspective are work flows built into a firm's CRM and/or portfolio management system that allow new staff to easily learn and perform those firmwide processes themselves — and perform them in like fashion to colleagues, peers and support staff as efficiently as possible, hence repeating them reliably.

CRM over the last few years has become the central hub of most advisory practices. In the 2013 Adviser Technology Study, 85% of participants acknowledged use of a CRM application, making it the most widely adopted software in the research.

It is worth noting that the average participating firm among the 300 in the 2013 report spends 5% of its total annual operating revenue, or 13% of total annual operating expenses, on technology. These firms also collectively increased their spending on technology by 31% in 2012 over 2011, and 50% of the participants in this year's study said they intend to increase their spending on technology this year over last.

Private Ocean's founder and president, Greg Friedman agrees with the premise that technology adds value.

“Whether you are selling or merging, all of that plays a pretty significant role. It actually affects the value of the firm,” he said.

Some people make the mistake of being “short-sighted, not factoring into their [return on investment] the ability to charge more in a sale by having a buttoned-down, highly productive ship,” Mr. Friedman said.

Yet to be measured but probably every bit as important is what the next generation of advisers thinks of your firm.

“My generation of advisers does everything: portfolio management, strategies etc.,” said adviser, certified public accountant and technologist Sheryl Rowling. “It is easier to pass that on when you have it automated and systematized. The new generation [of advisers] is into technology and understands it already out of the gate.”

And it is the intertwining, integration and meshing of processes with technology that will allow advisers to make a solid sales pitch to potential buyers of their firm.

“It is just like CPA firms before they adopted tax prep software — you wouldn't want to go to one of them today [or] you would wonder at how backward they must be,” Ms. Rowling argued.

Rich Gill at Focus makes the point a bit more succinctly.

“Make sure your firm is 'takeoverable,'” he said. “To have real structure equals process, technology infrastructure and experienced people. Otherwise, you just have a book.”


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