This is the second in a three-part series on the challenges facing fee-only advisors. Part 1, which appeared in the December 2003 Investment Advisor, addressed advisors’ marketing challenges. Part 2 addresses the use of technology. The next and final article, to appear in February 2004, will discuss how advisors can use comprehensive business benchmarking to measure their success and improve their practices.
For some, technology represents their worst fear, a mysterious, perplexing world of hard drives, servers, and software. For others, it is an essential partner, an almost magical tool that helps solve their most pressing management and administrative challenges.
Most fee-only advisors fall somewhere in the middle of this using-technology spectrum. But when employed effectively, technology not only can streamline administrative tasks, it can also enhance asset management capabilities, augment client capacity, and increase overall office efficiency. In short, effective deployment of technology can improve the overall profitability and quality of an advisor’s practice.
Whether due to the harsh investment environment of 2000-2003 or a natural evolution in the technology market, more products are now being designed for financial intermediaries. This creates opportunities for advisors, but may also result in difficult decisions.
The research and experience of Tiburon Strategic Advisors suggests that fee-only advisors are fairly cautious in adopting new technology, a caution that can be both good and bad. Advisors who are slow to adopt could be missing services and products that would streamline their operations and raise the quality of the services they provide. On the other hand, pursuing every new technology offering could waste an inordinate amount of time for advisors who are already challenged by demands on their time and energy.
Start With the Basics
Most advisors have three major objectives: to provide quality financial planning and investment management, to maintain a high level of client satisfaction, and to run an efficient office. In every decision related to technology, advisors should be asking specifically how the new technology will contribute to the achievement of these goals.
A key factor in the success of any technology initiative is the ability to allocate appropriate capital and personnel resources. The amount of money and time spent on technology should correlate to the life cycle of the advisor’s practice. For a small firm, spending significantly on technology is probably not the most productive use of scarce capital; it’s far better to install the minimum needed to run the practice and then focus on sales and marketing.
We will review the technology options available to help advisors achieve key business objectives, focusing primarily on investment capabilities and client service. We will then suggest key action items.
Technology and Investment Management
Since an advisor’s business revolves around asset management, including financial planning, asset allocation, money manager selection, and portfolio tracking, this is naturally the area where advisors hope to achieve the greatest results from advanced technology products.
Following is a discussion of tools used throughout the asset management process, in descending order of their priority for most advisors. (This differs from the order in which advisors would normally use the tools with their clients.)
Portfolio Management Software
Managing client portfolios is the core of an advisor’s business, and though it is possible to track accounts using tools as basic as an Excel spreadsheet, most advisors prefer a more sophisticated product.
For fee-only advisors, Centerpiece is generally the most popular portfolio management product. However, Tiburon has found that advisors with $200 million or more in assets under management are more likely to use Advent’s Axys product.
Selecting portfolio management software has become particularly challenging, given some recent changes in the marketplace. Charles Schwab & Co. previously acquired the company that provides the popular Centerpiece software and, other than existing Centerpiece users, now makes the software available only to those advisors who use Schwab as their custodian. The most viable alternative to Centerpiece, Advent’s Axys, has a number of advantages, but may not suit all advisors. Advent also acquired successful upstart TechFi, removing a promising new competitor.
Given the consolidation among portfolio software vendors, a number of advisors are struggling with decisions about their portfolio technology. However, transferring accounts to a new system can be potentially disruptive and time-consuming, so many advisors are likely to remain with their current provider unless it truly becomes a detriment to their client service.
Asset Allocation Software
Many advisors use software to determine appropriate asset allocations for their clients’ portfolios, although some rely on a more conceptual “yellow pad” approach. Morningstar Principia is decidedly the leading provider in this category, among both smaller and larger advisory firms. Other providers include SUNGARD/Frontier AllocationMaster, Ibbotson Encorr Optimizer, and Integrated Capital Engine, or ICE, from Advisory World (formerly Wilson).
In the asset allocation area, the most significant trend in recent years has been the use of Monte Carlo simulations. Traditionally, most asset allocation software packages were fixed point calculations where the software provided one projected result for the client, given the supplied data.
Monte Carlo simulations acknowledge that the future is unpredictable. Using random number generation, a Monte Carlo simulation calculates a range of future values for a client’s money.
These programs vary from vendor to vendor, so advisors should evaluate all features before selecting a program. Common features include the ability to:
o Choose either specific assets or asset classes or asset classes
o View underlying variables
o Adjust variables
o Handle one-time events
o Observe cash flow data throughout the period, rather than only an ending value
Data and Research Services
These enable advisors to analyze and compare mutual funds, variable annuities, separate accounts, hedge funds, individual securities, and other investments they might recommend to clients. This is Morningstar’s primary area of expertise, clearly indicated by Tiburon’s research among advisors. Over 76% of advisors report using Morningstar Principia or Principia Pro in their investment selection process.
Increased use of Internet-based information is an accelerating trend among advisors. Tiburon research indicates that a growing number of advisors visit Schwab, Morningstar, Fidelity, or other Web sites to research individual investment products.
Depending on their practice, advisors may or may not offer financial planning services. Many use Morningstar as a financial planning resource but they may be overlooking more functional alternatives such as Financial Profiles and Money Tree.
Trends in Client Service Technology
The second primary group of advisor technology tools includes those designed to enhance the client experience. The focus here is on improved delivery of information and service.
A few examples of popular technology in this area include:
o Advisor Web sites offering access to general information
o Online account statements for clients
o Client account aggregation, including accounts held with the advisor and accounts managed elsewhere
Offering a Web site, in particular, can build greater client confidence in an advisor. There are four key reasons to establish your own site:
o Increase client access to account information. Giving clients the ability to visit a firm’s Web site, enter their password, and check their account balance at any time can have a surprisingly positive impact.
o Reduce costs. When clients visit a site for inquiries about straightforward information such as account balances, advisors can reduce costs and direct staff resources in a more productive fashion.
o Support marketing efforts. A Web presence is equivalent to putting a brochure about the firm in a place where anyone can access a copy. A Web site can also support a referral program: clients are often more comfortable pointing someone to a Web site for an introduction.
o Archive materials. This reinforces credibility. Advisors who maintain Web sites can archive research reports, articles, or other published materials. This can enhance the firm’s credibility.
Another major trend in client service technology is account aggregation, which is expected to grow further in popularity. Advisors are paid to look at a client’s entire portfolio and develop an asset allocation and management plan that considers all of the client’s assets, even if the advisor is not managing the entire portfolio. This particular technology enhances that ability.