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The Race for ROI: Now Is the Time to Invest in Technology

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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.

For example, consider the case of a medium-sized firm with $1 million in revenue. If a technology implementation will lower overhead costs by a net 9% ($90,000) per year, these savings drop directly to the bottom line, increasing profits and cash flow by a corresponding amount. When a business value multiple (in this example, a conservative estimate of 10) is applied to this increased profitability, then the net business value increase achieved is $900,000. Not bad for a $10,000, $20,000 or even $50,000 purchase.

When viewed in the light of the business value multiple, just about any investment in technology that will save staff time and increase capacity becomes a very simple decision.

Challenge Assumptions

When developing their technology plan, advisors should constantly re-think the way they process their business.

When asked, leading advisors say that the key to their success in building efficient businesses is to continually challenge their assumptions as to why and how certain things are done. This process of self-examination can have a dramatic impact.

As an example, consider the recent experience of a successful independent advisory firm in Southern California that was growing rapidly. As part of its history, the firm prided itself on its reporting and communication with clients to service their entire financial picture.

Inherent in that, however, was a vast manual reporting system that had been cobbled together through the years and was quickly becoming an operational burden and a nightmare to manage. Because the firm had continued to do business as usual, it was beginning to fall behind in service, while communications and reports provided as its “standard” service model were taking nearly a month out of every quarter to complete.

Just before the firm reached a breaking point, however, it started to challenge the way it provided reports and invested in a composite application to automate the process by integrating document management technology with the portfolio management system and CRM software.

This integration allowed the firm to publish reports electronically to private, secure client websites, triggering an email to clients informing them that their report was ready to be viewed. Because it could track the email opening and report downloading, the firm realized that less than one in 10 of its clients actually viewed the reports.

What the firm had thought would be a service decrease by switching to electronic delivery actually wasn’t a decrease at all. In reality, it was a service increase as the information was much timelier. Additionally, the firm realized that it had completely misunderstood what its real value proposition was to its clients. It was clearly not in providing quarterly reports.

By challenging its assumptions and existing ways of doing business, the new technology saved the firm roughly three weeks per quarter of staff time and tens of thousands of dollars in annual printing, collating and mailing costs. It also provided added capacity to grow the firm without adding additional back-office staff.

Looking back, the firm realized that had it viewed the cost of the technology as an added expense, it might never have invested in the first place. This realization was critical to continued success and the firm is now looking for ways to automate virtually every process.

Think Differently

Other ways to stretch technology can be seen in thinking differently about the types of solutions used and to understand the true costs of a process. Operational costs include not only the actual dollars for the software, hardware and systems, but also in the staff time it takes to run that software, including operational time, training, management and maintenance.

An excellent example of this can be seen with some of the daily processes related to account maintenance and data reconciliation. Typically, many firms are using in-house systems that require a lot of manual work to accomplish these tasks, despite advancements in technology and new outsourced service models that can efficiently handle these manual steps with a higher accuracy rate and much less staff time.

According to the “2011 Asset Management Operations and Compensation Survey” by Advent Software, The Investment Adviser Association and the Advent Users’ Group, advisory firms using in-house systems spend 25 hours per month for small firms, 60 hours per month for medium-sized firms and 160 hours per month for larger firms on account reconciliation.

Contrast this in-house process with an online portfolio management and performance reporting system that automatically performs account reconciliation on a daily basis via electronic feeds from custodians and other data providers as part of its service model: Virtually all of these tasks and staff costs are eliminated, with a much higher confidence rate and fewer errors.

Thinking differently in this case creates capacity by outsourcing what was once a core internal process to those who can do it better, faster and cheaper due to advancements in purpose-built technology.

These are just a few of the many ways advisors can magnify the return on their investment in technology as they race to build the necessary infrastructure and capacity to efficiently scale and grow their firms to capture a disproportionate share of the coming opportunity.

So too, can you. Start with a plan, challenge assumptions, think differently, take advantage of increased multiples and start investing now to get the most of your technology dollar today.    


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