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June 01, 2009 at 04:00 AM
A new study published by Moss Adams and Pershing affiliate iNautix–The Art of Efficiency: A Holistic Approach to Operations–reveals what most suspect but perhaps won’t acknowledge: that a broker/dealer’s growth can be stunted, the investor experience harmed, and the firm’s brand jeopardized by the lack of an efficient operational platform.
Sustained levels of high profitability can only be achieved through efficient operations, but some broker/dealers still have gaps in efficiency as well as in prioritizing such hallmarks of efficiency as ease of doing business and technology, the study concluded.
These findings are critical to explore at a time when profit margins, in the low single digits in better times, are being squeezed by the current financial tsunami. “The rug has been pulled out from under them in terms of revenue,” notes Mike Nesspor, a managing director of iNautix (USA). “Expenses are probably far outstripping revenue at this point.”
The study first investigated the characteristics of the top tier of survey participants to figure out why they were the most profitable. It found that these firms have simplified processes, integrated systems, greater productivity, and a staffing model that had a smaller proportion of operations staff to employees. The top quarter of the profitable firms studied, for example, take 50% less time to process an account transfer and 20% less time to process a new brokerage account. They also generate 42% more revenue and support more than four times the number of advisors per home office staff.
iNautix points to four key components that need to be integrated for a firm to perform well. They are: process; people; technology; and product strategy, says Nesspor. An example of such integration is allowing advisors to initiate more transactions. Efficiency often means a broker/dealer that isn’t top-heavy, according to the study, and instead a culture that supports operational initiatives and streamlined business procedures.
The broker/dealer has the same set level of fixed costs and operations effort for each advisor, whether his production is high or low, as the study points out. Perhaps, speculates Nesspor, top B/D performers have advisors that produce more because they are part of an efficient operation. But efficiency and profitability produced “a very strong correlation,” he reminded. “Regardless of how we sliced the data, the most efficient firms were also the most profitable as well.”
Meeting New Challenges
What are the top challenges broker/dealers face? They identified a few themselves, noting paper-intensive processes, a lack of automation, increased regulatory requirements, and disturbingly high not-in-good-order (NIGO) rates.
Nesspor pointed out that the NIGO rates among respondents were “much higher than what we have heard when we have been out with customers. The rates reported were much closer to what Pershing sees.”
