Let’s get right to the bottom line: Technology costs money.
The cost plays a significant role in any new technology purchase that you may be considering. In many cases, it becomes the key criterion for selecting a technology solution. There are surveys conducted regularly that indicate what percentage of their revenue firms spend on technology, and advisors tend to compare themselves with the surveys to determine if their firm is spending the right amount. Perhaps you have heard other firms state that they are increasing their technology spending in the next year. Why would any firm commit to spending more money without defining their goals first? The reality is that so many variables can influence the technology expense line of a firm. So how should you evaluate the effectiveness of your firm’s technology spending? How should you think about spending your next dollar on technology? The answers to both questions are straightforward—if you conduct your evaluation process properly.
The first place to start is with the technology solutions that your firm currently owns. How satisfied are you with the technology you have? Give your technology an overall satisfaction rating, then ask yourself if you are receiving the appropriate level of value with your current technology solutions. Rate your individual technology solutions on a scale of one to 10. The value rating is often the prime mover with new technology purchases.
Answering these two simple questions will give you a clear starting point and allow you to make sensible judgments about complex systems. For example, before you purchase an asset rebalancing solution, make sure you are satisfied with your current portfolio reporting solution, which will be a critical component in providing account data for the rebalancing process. The last thing that you want to do is pile new technology solutions on a product or platform that is not currently meeting your expectations. Be careful not to assume that the hottest new technology solution will make your existing technology products better. You may discover that your money is better spent on replacing a more essential solution before adding something new. Sometimes the best step for moving forward is to back up just a bit.
Another part of the evaluation takes into account how you view your overall technology expenses. Unlike your office rent, which is generally a consistent amount, your technology expenses should be analyzed in detail and on a regular basis. I often hear advisors make comments like: “I can’t believe how much I’m now paying this technology company.” The reality behind this comment is that the cost itself isn’t really a surprise—most advisors know the terms of their contracts. Rather, it is the fact that they believe the cost is too high based on the current value they are getting out of their technology. Of course, the objective is to not let this happen. The best practice is to use the regular technology expense review process as the means to confirm you are continuing to receive the value you expect. No surprises and no buyer’s remorse.