From the March 2009 issue of Wealth Manager Web • Subscribe!

Technology Curve

Faced with declining asset values and the prospect of a deep and prolonged recession, approximately 30% of a recently surveyed group of independent registered investment advisors (RIAs) will be cutting back significantly on technology spending over the coming year. But while they may be fearful of the viability of some technology vendors, the majority of advisors expect to invest selectively in areas such as tools to improve the quality of client advice and planning, collection of data from custodial accounts, and--based on an expectation of increased regulation in the wake of the Madoff affair--compliance. Outsourcing is also likely to increase as advisors move to technology solutions with pricing that scales down with the decrease in value of their AUM.
These findings are based on a survey of how the downturn in the economy will impact the way advisors use technology. The survey was conducted in mid-January by Wealth Manager and Advisor Perspectives, and followed up in a series of interviews with individual advisors.

Large firms weigh options

Of the 30% of RIAs that said they would either cut back on technology spending or outsource parts of their operations, large firms will make the biggest moves. Among these firms--those with AUM of $500 million or more--a striking 45% indicated they would be making changes, cutting back, or taking a different approach to technology.

The fee-only, AUM-based model that distinguishes most independent RIAs was bound to suffer along with the 37% decline in the U.S. markets last year. With their business model facing serious pressure, advisors are expected to cut costs aggressively in order to maintain profitability. For virtually all firms, cost cutting translates to reducing staff or saving on technology; other big line items in expense budgets--like office space--cannot be reduced quickly enough to react to the drop in market-based revenues experienced over the last nine months.

Generally, in-house technology budgets are not tied to assets under management, and thus are not tied to revenues. Hardware and communication costs are largely fixed, and fees for key technology components (e.g., portfolio management, performance reporting, research, and financial planning) are often fixed or tied to account volume--but not to assets under management. As revenues shrink, larger firms face proportionally more challenges because they have more staff and infrastructure devoted to serving a shrinking asset base.

Of those surveyed, 14% said they plan to outsource more of their operations due to the recession, with the percentage rising along with the size of the firms: 18% of firms with more than $1 billion in AUM and 15% of those with AUM of $500 million to $1 billion indicated plans to outsource. Because outsourcing fees are typically tied to AUM levels, they offer a cost-cutting alternative for advisors in the current environment.

Jon Persson, CFP and director of Financial Planning at New York-based Geller Family Office Services, has over 30 years of advising experience. Persson describes the disparity between large and small firms by saying, "There is a big push for what we, as a smaller firm, can do with technology to help clients, as opposed to the wirehouse technology budgets." Persson remains optimistic about the value of the independent business model, noting that "technology budgets may suffer, but the advisory industry will improve its client-based focus and will ultimately come out healthier after this downturn."

Client numbers hold steady

Declining markets and escalating volatility appear to have a silver lining for the advisory market: Advisors are serving more clients. An overwhelming majority of firms reported that their client lists are not shrinking. In fact, 90% of respondents said the number of clients they manage has increased or stayed the same--with 45% of respondents reporting that the number of their clients has increased since the financial crisis escalated.

Several factors explain this seemingly inverse relationship. Because most respondents were independent RIAs, much of their growth is coming at the expense of wirehouse and brokerage firms. Certainly, some clients have moved because of the failure of firms like Lehman Brothers or because of insecurity regarding the financial viability of some of the larger wirehouse firms. Others simply seek the more personal and independent approach of an independent advisor

"It's a reflection of a growing attitude of investors' believing 'maybe I should be dealing with somebody who doesn't have something to sell me...maybe I should be dealing with people who aren't connected to these big organizations who have their own agenda, not mine,'" Persson suggests.

Buyers will be wary

Roughly 18% of all survey takers said they planned significant technology cutbacks in 2009 with, as noted above, the number rising to 30% among independent RIAs only. But the challenging economic environment is not holding back some firms from buying new systems. Approximately 53% of respondents indicated they would be purchasing at least one new application--with results spread fairly evenly across six categories.

The most popular area to attract advisor spending is portfolio management, with a surprising 16% of respondents indicating they would be replacing their existing system. Advisors with in-house applications are clearly looking toward outsourcing this core component of their operations.

The second largest spending category--cited by just under 13% of respondents--was a paperless service, an area that appeals to a growing number of firms looking to save money and energy. This was tied with financial planning systems at just under 13%, as advisors look for more creative solutions to deploy diminished account values to serve clients' needs.

Financial planning continues to be a major concern for wealth managers and independent advisors. "We want to make sure we are showing the value of the advice," says Brent Bentrim, CEO of Caropolis Fiduciary Counsel, a Charleston, S.C.-based firm, "not the investment products."

Many advisors are sticking with familiar tools of the trade. "We use Junxure as our client resource management system, and that works well. We can link client information with Excel spreadsheets, Word documents and email through Outlook," says Persson of his operations. But the setup comes with hassles: "Right now it is extremely cumbersome. Answering questions like, 'Where are my investments this minute?' are a little more difficult. That problem is not solved," he says.

Some advisors are addressing their technology needs with their own inventions. "Very rarely do we buy any off-the-shelf programming," says Bentrim. He plans to develop several new systems engineered to handle the specific workload of an independent advisor. "Much of the off-the-shelf technology is geared towards the FINRA broker/dealer, not an RIA," he says. "If you build it correctly, technology can make advice scalable. That's one of the largest issues the RIA has in differentiating himself from a broker/dealer: How do you make that quality advice scalable."

Persson sees baby boomers behind many of the future trends in technology. "Boomers are going to want to jump on the Internet and find out what's going on. They're going to want to communicate via email. The ability to be mobile and stay on top of personal finances is a big part of what's happening," says Persson. He sees "more and more and more Web-based delivery" as the population begins to get comfortable with the available technology.

Compliance is a major concern

The Madoff scandal sent shockwaves through the investment community, eroding client confidence and refocusing advisors. As a result, compliance is poised to drive many technology decisions in the coming year.

While an average of one-in-four survey respondents said that they expect to spend more on compliance in 2009, that number comes closer to one-in-three for firms with AUM of greater than $1 billion. Larger firms, or those that manage wealth for ultra-high-net worth clients, will be spending more in anticipation of a new regulatory environment and increased scrutiny related to due diligence on alternative investments such as funds-of-funds.

In addition to compliance, some expressed concern about the role of security and data access management. Persson, whose clients include many high-profile individuals, describes data security as a priority. "One of the problems we have is balancing our need for maintaining our clients' privacy and the security of our data with the ease of use of getting the information. That's the balance that many firms are facing." He predicts a more online focus. "Over the next five years, there's no question we're going to get more comfortable with Web-based applications. The security and protection of that data is going to improve, and our clients will benefit," he says.

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