From the January 2011 issue of Investment Advisor • Subscribe!

Better Advising Through Technology

Orion Advisor Services reveals the future of practice management information

When I give speeches these days, one of the things I like to talk about is how technology has driven independent financial advice. From the HP 12c in the early ‘80s, to desktop computers, Lotus 1-2-3, myriad pioneering applications such as Advent and Schwab Link, and finally, today’s Internet, the evolution of digital technology has enabled advisors in their own offices to access the same information—about clients, investments, markets, regulations, and strategies—as brokers or bankers at the largest institutions. Once the playing field was leveled, the advantages of independent advice became inescapable.

Some years ago, I heard Dr. Paul Saffo, an expert on technological advancement at Stanford’s Institute for the Future, say that it takes about 100 years for people to figure out the best uses for major advances in technology, such as the printing press, the internal combustion engine, electricity and, of course, the Internet. Since Al Gore invented the Internet in the ‘70s, we still have quite few a years to go before we sort out the Net (I know, it will come as a shock to some that shopping and pornography might not be the ultimate end game).

We can see this ongoing evolution in our own little corner of the world, with new platforms and applications being introduced almost daily to help independent advisors better serve their clients and operate their businesses more efficiently. It’s a full time job just to keep up with what’s new, and there are certainly folks who devote a lot more time to it than I do. But when new technology spills over into one of my areas of interest—building better advisory firms—it tends to get my attention.

The latest advancement in advisor technology to catch my eye comes from Orion Advisor Services in Omaha, Neb. To start with, Orion has one of my green flags for advisor tech companies in that it started out as an advisory firm (with some $1 billion under management). Then, in the late ‘90s, it became frustrated with the existing technology. It seems the portfolio management platforms had trouble keeping up with the firm’s some 10,000 accounts, not to mention consolidation and client service. So they developed their own tech solution, and in 1999 began offering it to other advisors to amortize some of those development costs. In my experience, few technology platforms work as well as those developed for people who have to use them.

I suspect that Orion’s groundbreaking innovations stem from their perspective as advisors first, trying to run their practice better. Today, Orion’s platform consists of fully integrated desktop with portfolio management, reporting, trading, CRM and compliance tools, which is no easy feat, to be sure. But to my mind, Orion’s truly innovative feature came from the realization that a platform which housed all of a firm’s account and client information is in a prime position to evaluate how that firm is doing—from both a financial and growth perspective. And when that info is compared to similar data from other firms, what it might do to get better.

Here’s how Orion’s founder and president, Eric Clarke, describes the genesis of his firm’s battery of advisor metrics: “The concept came out of a forum that I moderated where I had asked advisors what they were doing to retain clients during the market downturn. An advisor responded that he hadn’t lost any clients, and when I pressed him further, he said that he ‘fired two clients that didn’t understand what he was providing, and one of them took another 16 clients with them when they left.’ It was at this point I realized that many of the industry surveys are based on advisor responses that are completely subjective. On the flight back home, I came up with three objective categories that we could use to compare advisory firms to their peers: net new accounts, assets under management, and account performance.”

That was in 2008, and those metrics formed the basis of what’s now called Orion’s Advisor Report Cards. Today, based on over $45 billion in assets it administrates for more than 215 advisor clients in some 365,000 client accounts, Orion also offers a Business Metrics Report, a Financial Ratio Report, a Service Metrics Report, and a Performance Report. As you might suspect from their names, the four reports include metrics designed to provide an accurate view of how each firm is doing in vital areas:

• The Business Metrics Report looks at the factors that indicate how efficiently the business is running, and provides an indication of the growth in value of the firm: changes in assets under management (total vs. markets, by account, management style, fund family and custodian), cash inflows and outflows, staff productivity and client segmentation.

• The Operational Service Report looks at how the firm is managing its current volume of work, and indicates where any bottlenecks are occurring: the number of e-mails and calls into the firm, the response times for handling client issues, processing timelines, and the utilization of Orion’s platform services.  

• The Financial Ratio Report provides a snapshot of the financial health of a firm: the balance sheet, income statement, staff count, compensation, gross revenue to net revenue, and net income trends. Although Orion doesn’t do it yet, these metrics could also be compared with those of other firms to identify areas of concern and opportunity. I’ve always thought that comparing one advisory firm’s financial information to another is risky business; rarely are two firms alike, nor are the owner/advisor’s goals. But the exercise can still be very useful for showing where a firm differs from the norms and best practices, so the owner can determine whether it’s acceptable.

• The Performance Report provides a global view of how the firm’s accounts are doing against advisor-designated benchmarks. This Report is most interesting in that it comes very close to providing an analysis of the overall performance of the firm. I suspect that in the future, with some refinements (and probably some regulation), this type of report will form the basis for comparing how well advisory firms manage client portfolios.

The Advisor Report Card, then, compares the three key performance metrics that Clarke conceived in ’08—net new accounts, changes in AUM, and account performance—of each practice with other advisory firms. It’s a huge first step toward providing an accurate assessment of where a firm falls in the advisory community—and the areas that its owner/advisors might focus on for improvement. What makes the Orion metrics truly groundbreaking is that they are based on real practice information, not surveyed data or information otherwise provided by the advisors themselves. “I don’t know why firms who clearly have this information on their affiliated advisors, resort to collecting it again in unaudited surveys,” said Clarke.

And running the risk of getting “non-objective” data—which many of us who analyze the practice performance data that countless gurus churn out these days—is sure to skew the results. Orion has yet to collate all its data into a large, combined annual report, but I hope they soon will. I believe such a report would change the industry. It would showcase how real advisory firms are performing in the real world, revealing the fudge-factor in many existing “studies” and forcing would-be gurus to find better data.

This is exactly what technological innovation in the Information Age is all about: using a new technology to collect better data, replacing older attempts to approximate what that data might be. Look at what the Internet has done for shopping prices: No longer can retailers get away with charging high mark-ups. Today, when most people buy everything from running shoes to automobiles, the first thing they do is to jump on the net and start comparing prices.

I suspect it won’t be long before advisory services start to fall into that efficient pricing frontier, as well. Just as those exorbitant wrap fees at wirehouses are a thing of the past, ridiculous advisory fees are probably doomed, too. And all advisors will undoubtedly feel some pricing pressure sooner or later. I also suspect that as firms adjust to this new pricing model, advisors will put a much higher priority on operating their practices more efficiently. Which means that real data showing how the most efficient practices got that way will be in much greater demand.

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