Advisers: Time for a tech wake-up call

How is it that in 2013, paperclips, glue and excel spreadsheets are still being used by many firms to manage trillions of dollars of client assets?

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Despite the overwhelming success and growth of the independent advisory industry, it is shocking to realize that the majority of growth has come on top of an incredibly fragile technology infrastructure.
Paperclips, glue and excel spreadsheets are being use by advisory firms to manage trillions of dollars of client assets, a trend that simply is not sustainable.
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Many industry studies, including recent ones by Investment News, show that for many firms the number one choice for their core systems such as CRM, document management, portfolio management, financial planning, rebalancing and the like is “none” or basic software tools such as Outlook, Adobe Acrobat and Excel that are not specifically designed to perform the critical functions in the process of rendering financial planning and investment advice.
These gerrymandered client service platforms are extremely fragile. Advisers who are using manual solutions cannot scale their practice nor provide the critical service consistency needed to efficiently and effectively manage an advisory practice, much less make million dollar investment decisions for their clients. Manual processes involving other people’s money are prone to errors, bring operational risk and a declining service level as firms take on new clients and the operating and regulatory environment becomes ever more complex.
So, advisers, please consider this post a “technology wake up call.” New advancements in technology and the rise of purpose-built software platforms designed specifically for automating and enhancing wealth management workflows are readily available at affordable prices.
Perhaps if firms looked at technology not as an expense, but as an investment, they might speed up adoption. As an example, consider the business valuation impact of technology.
According to valuation experts, advisory firms today are being valued at approximately five to 15 times cash flow (also known as EBITDA), depending on how large a firm is and other metrics. In the case of a technology decision, if the new system lowers overhead and increases cash flow, then the return on that investment in terms of business value can be quite dramatic, beyond just the annual cost savings.
For example, consider the case of a medium sized firm with $1 million in revenue. If a technology implementation will lower overhead costs by 10% ($100,000) per year, these savings drop directly to the bottom line, increasing profits and cash flow by a corresponding amount. When a business value multiple (conservative estimate of 10 times in this case) is applied to this increased profitability, then the net business value increase achieved is $1 million. Not bad for a $10,000, $50,000 or even $100,000 purchase.
When viewed in the light of the business value multiple, then just about any investment in technology that will streamline operations and increase capacity should become a very simple decision.
What do you think of your technology? Are you still using paperclips and excel spreadsheets? If money wasn’t a consideration, what two technology upgrades would you make today? Join the conversation!
Timothy D. Welsh is president and founder of Nexus Strategy LLC, a leading consulting firm to the wealth management industry, and can be reached at [email protected] or on Twitter @NexusStrategy.