The new adviser imperative: Getting the most bang for your technology buck

How can you get the most out of your technology investments?

The answers may surprise you. For many advisers, the question isn’t necessarily how to spend money on software, hardware and systems; rather, it is how to use that technology to get a return on investment in terms of simplifying operational tasks, achieving efficiencies in service delivery and, ultimately, lowering overhead costs.

Historically, advisers have underinvested in technology because they could afford to. Since the early 1980s, advisers have benefited from an unrelenting upward march of the markets, which translated into a very nice annual raise based on asset management fees. This hidden “subsidy” weakened management discipline, fostered manual processes and ultimately created larger operational footprints than are currently economically sustainable.

Now, however, it is time to play catch-up. Clearly, this is a new era.

Venerable institutional providers of financial advice have seen 100-year legacies vanish literally overnight. Money center banks are being propped up by massive government transfusions, while vast mergers are sweeping up the rest, leaving independent financial advisers, their custodians and broker-dealers as the last standing providers who have been untarnished by the scandals and failures of Wall Street.

These independent financial advisers once occupied a sleepy part of the investment advisory industry. Today, they are being propelled into the forefront as advisers of choice for objective and conflict-free financial advice.

But with this unprecedented opportunity comes challenge.

Industry studies and experts all point out that independent advisers haven’t built efficient operations and often rely on manual, paper-based processes. This structural issue and the drop in revenue due to a reliance on asset-based fees have created serious pressures on their capacity to grow and to operate profitably, causing many to cut staff and spending at the exact time that a steep growth curve is heading their way.

For advisers, this means that adopting technology that streamlines the back office, permits clients to be served more efficiently and effectively, and creates an infrastructure that can scale with growth has become a necessity, not a luxury.

GETTING STARTED

But where do you start? How can you leverage and increase your technology investments in these tough times?

Industry experts agree that the best approach to building an information technology “blueprint” is to begin with a plan. Just as financial advisers develop a long-term financial plan to help clients make intelligent financial decisions, so too should advisers adopt a plan in order to make technology purchase decisions that maximize limited resources.

Your technology plan should be considered as an investment in your firm’s growth and ultimate business value. When advisers think of technology in this strategic way, they quickly realize that not only should they be smart about how they allocate their technology dollars, they should increase their technology spending to permit more efficient and profitable operations.

According to a recent industry report published by San Francisco-based Schwab Institutional, “Technology Best Practices: Making the Most of Your Technology Investment,” top-performing firms are investing in technology that has a clear link to their strategy and growth plans. From there, they create a technology plan to support the infrastructure needed for that growth, viewing technology not as an operating expense but as a building block of capacity.

The report goes on to identify the technology investments that provide the greatest improvement in efficiency and offer the highest return on investment. Some of these are quarter-end processing and reporting, customer relationship management, document management, web presence, training and outsourcing. The report also mentioned as key to success the ability of the various systems to integrate and work together as one, and not as multiple, disassociated applications.

These technology features and integrations score the highest on ROI and efficiency gains because, for the typical advisory firm, they streamline activities that traditionally have been the most labor-intensive and the least likely to have been updated over the years.

In these turbulent times, however, advisers can no longer afford to continue to operate inefficiently and must challenge their assumptions as to why and how certain things are done.

As an example, consider the recent experience of a successful, rapidly growing independent advisory firm in Southern California. As part of its history, the firm has prided itself on its holistic advice, and comprehensive client reporting and communications. Delivering such services, however, required a vast manual-reporting system that was cobbled together through the years and quickly became an operational burden and management nightmare. Because the firm continued to do business as usual, it began to lag in service. Completing the printed reports that were provided as part of the firm’s standard service model consumed nearly a month each quarter.

When it was close to reaching a breaking point, the firm started to challenge the way it provided reports, and invested in document management technology that was integrated into its portfolio management and CRM software. Through this integration, the document management software became the firm’s “paper-moving” system, allowing it to publish reports electronically to private, secure websites, and then trigger e-mails that inform clients a report was ready for viewing. Because it could track the number of e-mails that were opened and viewed, the firm learned that fewer than one in 10 of its clients actually looked at their reports. What it had thought would be a service decrease by going to electronic delivery actually wasn’t a decrease at all. In reality, it was a service increase because the information was much timelier. Additionally, the firm realized that it had completely misunderstood its real value to clients. Clearly, it was not providing quarterly reports.

By challenging its assumptions and existing ways of doing business, the new technology saved our Southern California firm roughly three weeks per quarter of staff time and tens of thousands of dollars in annual printing, collating and mailing costs. Looking back, the firm realized that, had it viewed the cost of technology as solely an expense, it might never have invested in the tools. Realizing that technology investments are critical to its continued success, the firm is now looking at ways to automate virtually every process.

Other ways to stretch technology budgets can involve thinking differently about solutions used and the true costs of a process. Operational costs include not only the actual outlay for software, hardware and systems, but also the staff time needed to run the software, including operational time, training, management and maintenance.

According to Dan Skiles, vice president of technology at San Francisco-based Schwab Advisor Services, the cost of back-office staff time is roughly $40 per hour.

“We determined this hourly estimate based on simply asking clients over the years. We have heard costs as low as $15 and as high as $100-plus per hour. Generally, $40 has been accepted as a good estimate.”

When advisers factor in staff time and related costs, it is clear that the best way to leverage technology is to implement it in a way that optimizes acquisition and operation costs.

An excellent example of this can be seen with some of the daily processes related to account maintenance and data reconciliation. Instead of using new, outsourced service models that require little staff time, but can handle these tasks with great accuracy, many firms use older software systems that require considerable manual intervention.

According to the “2008 Asset Management Operations and Compensation Survey” by San Francisco-based Advent Software Inc., the Advent Users’ Group and the Washington-based Investment Adviser Association, account reconciliation using software and manual processes consumes 35.4 hours per month at small firms, 70.8 hours per month at midsize firms and a staggering 299.8 hours per month at larger advisory firms. That amounts to roughly a full week per month of a staff member’s time at small firms, two weeks of time at midsize firms and a full-time job for two staff members at larger firms — for just one tedious, error-prone task.

Contrast this software/manual process with an online portfolio management and performance-reporting system that automatically performs daily account reconciliation via electronic feeds from custodians and other data providers as part of its service model. Virtually all the manual tasks and staff costs are eliminated, with a much higher confidence rate and fewer errors.

At the rate of $40 per hour for a back-office employee, the potential cost savings are substantial, ranging from $17,000 per year for smaller firms to $34,000 or more annually for midsize firms and a stunning $144,000 per year for the largest firms. These savings alone more than offset the costs of an outsourced solution, not to mention the ability to redirect those staff resources toward revenue-building and client-facing activities.

The final consideration for advisers in evaluating a technology purchase decision is to understand what that system can do for their ultimate business value. With the average age of adviser principals approaching 55, there is a clear mandate for succession planning and business transition.

As part of that, leading advisers realize that the more infrastructure, scale and efficiency they build into their firms, the higher the value they can monetize when they exit the business and sell their equity either internally to a junior partner or externally to a third party.

When this concept is applied to a technology implementation, the results become extremely compelling.

According to leading industry and valuation experts, advisory firms currently are being valued at approximately five to 15 times cash flow, depending on firm size. (Larger firms receive higher multiples because they are deemed as having less transition risk, among other reasons.)

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 midsize firm of $1 million in revenue. If a technology implementation lowers overhead costs by a net 4% ($40,000) per year in staff time, these savings drop directly to the bottom line, increasing profits and cash flow by a corresponding amount. When a business value multiple is applied to this increased profitability (let’s use a conservative estimate of 10 in this case), then the net-business-value increase achieved is $400,000.

When viewed in the light of the business value multiple, just about any technology investment that reduces staff time becomes a very simple decision. If you need help making technology decisions and finding ways to increase investment returns, seek out and question top vendors and industry consultants. Also invaluable are custodians and broker-dealers who can use their scale to provide the tools you need to be more successful.

Leading independent firms are investing aggressively to take advantage of the tremendous opportunities facing them. You can, too. Start with a plan, challenge assumptions, think differently and take advantage of increased multiples to get the most for your technology dollar today.

Timothy D. Welsh, a certified financial planner, is president and founder of Nexus Strategy LLC of Larkspur, Calif., a consulting firm to the wealth management industry. He served as chairman of the 2009 Financial Planning Association/InvestmentNews Technology Expo/Business Solutions Conference Task Force and can be reached at [email protected].