For many advisors, the question isn’t necessarily how to spend money on software, hardware and systems; rather it is how to use that technology to get an immediate return on investment (ROI) in terms of simplifying operational tasks, achieving efficiencies in service delivery, creating capacity and scale and ultimately lowering overhead costs.
Historically, advisors have underinvested in technology because they could afford to. For the last couple of decades, advisors have benefited from a general upward march of the markets, which translated into a nice annual raise based on an asset management fee. This “hidden subsidy” weakened management discipline, fostered manual processes and created larger operational footprints than are currently sustainable.
This became very clear during the market break of 2008-2009, when firms saw their profits and losses go negative as overhead expenses began to take up an ever-bigger percentage of revenues and costs stayed fixed or increased.
As a result, this structural issue and market hangover have created serious pressures on advisors’ capacity to grow and continue to operate profitably, causing many to cut spending at the exact time that a mammoth growth curve is heading their way.
With today’s volatile markets and wirehouses shrinking themselves, combined with an onslaught of baby boomers just beginning to retire, the demand for independent advice has never been greater. In fact, many predict that it will continue to accelerate in the years to come.
So, what’s an advisor to do? For starters, it has become a necessity, no longer a luxury, to immediately begin adopting technology to streamline back-office tasks, service clients more efficiently and build an infrastructure that can scale with growth.
Ultimately, advisors are now in a race to deploy technology as quickly as possible that will provide the return on investment, scale and capacity they need in order to take part in the massive market opportunity that is coming, and some may argue is already here.
Otherwise, technology laggards will be forced to sit on the sidelines at full capacity and watch as more nimble firms embrace new technologies to leapfrog to the forefront.
The good news is that with new, purpose-built technology applications from leading advisor technology firms, never before have advisors had such a broad array of solutions to choose from that are affordable and customized to their business models.
Planning is Key
How can advisors leverage and increase their technology investments in these interesting times? Industry experts all agree that the best approach to building an IT blueprint is to begin with a plan.
Just like financial advisors develop long-term financial plans to help their clients make intelligent financial decisions, so too should advisors so that they can make technology purchase decisions that make the most of limited resources.
Recent research reports from industry consultants and custodians have identified the most effective technology investments that provide the most improvements in efficiency and where the highest return on investment lies. At the top of the list are quarter-end processing and reporting, new account opening, document management, outsourcing and staff training.
Another key area identified as a success factor was the ability of various systems to integrate and work together. These integrated systems, known as “composite applications,” reduce manual data entry and automate many of the manual workflows required to process business.
The rise of the composite application that integrates multiple pieces of technology into one process will be the next advisor technology paradigm to grab hold of the industry.
Evidence of this can already be seen in the massive technology integration projects initiated by major custodians to combine brokerage systems with CRM technology to automate workflows, such as new account opening processes.
The reason that the above technology features and integrations score the highest on ROI and efficiency gains is that for the typical advisory firm, these systems streamline the activities that make up most of their manual efforts and are what historically have been “the way we do business.”
To combat that status-quo thinking, advisors’ technology plans should be considered an investment in their firms’ growth and ultimate business value. When advisors think of it in this strategic way, they quickly realize that not only should they be smart in how they allocate their technology dollars, but also they should actually increase their spending on technology because there is a direct correlation between lowering overhead expenses and creating business value.
Play the Multiples
When looked at from a business valuation point of view, leading firms are realizing that the more scale, capacity 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.
According to leading industry and valuation experts, advisory firms today are being valued between approximately five and 15 times cash flow (also known as EBITDA), depending on how large a firm is and other metrics. 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.