Close Close

Technology > Marketing Technology

Where Are Advisors Spending Their Tech Dollars?

Your article was successfully shared with the contacts you provided.

Cybersecurity has become a part of businesses’ daily vernacular, and it’s no different with investment firms. Over three-quarters of investment firms — up from 73.7% in 2015 — that responded to AUG Exchange’s Asset Management Operations and Compensation Study for 2017 said they planned to spend more on operations and technology, with a major focus on cybersecurity. Other key areas of IT focus were in regulatory/compliance and client relationship management.

“No surprises here,” Michelle McDonough, president of the Board of Directors for AUG The Exchange, told ThinkAdvisor. “The study validates gut thinking of operation managers and business leaders. The past few years, the trend in cybersecurity [spending] has been apparent … . Now the industry is going through a transformation, and cyber and protection of client information and data has become a top focus point, and in some cases has been eating up discretionary spending of small, midsize and, in some cases, larger firms.”

(Related: What to Do When You Outgrow Your Technology)

Robert Roley, managing director and general manager of SS&C Advent, which co-sponsored the study along with the Investment Advisor Association, said he has seen the strong trend with clients in growth of cybersecurity and compliance technology. “They aren’t doing it to be competitive, but to survive,” he said.

He did say he was a little surprised by the increased focus on client servicing technology, but he attributes this to the generational wealth transfer to millennials from baby boomers. “Digital presence and being able to interact with clients through technology by the wealth manager is also becoming an expectation and a way [for a firm] to differentiate,” he said.

Fifty-two investment firms participated in the 2017 survey. They range in size from large enterprises with more than $20 billion of assets under management (AUM) to smaller firms advising less than $1 billion of client assets.

Among participants, revenue met headwinds this year, with a 2.5% median growth of AUM across all groups. This was the weakest growth since 2009, and almost half the firms surveyed saw a decline in revenue. One in three firms reported net asset outflows. Roley said much of that is due to continuing fee pressure, as well as greater competition from smart beta and robo advisors. The study also found a growing increase in the number of firms considering outsourcing certain technology and operations, which McDonough attributed to firms focusing on economy and staying lean, as well as freeing them up to concentrate on their core business of investment management.

The survey also found that the hiring slowed to 2.3% verses 4% in 2015. McDonough noted that despite that, there was a growth in discretionary spending as well as increased compensation growth for “tenured and seasoned professionals.” In fact, the study found 79% of firms saw a growth in compensation, largely for research analysts and investment and portfolio managers. One growing trend was tying compensation to client retention, although profitability and personal perfomance were still the two main areas of compensation focus.

Firm productivity increased dramatically, with AUM per employee jumping to $450,000 from $250,000 in 2011. McDonough said that jump came “out of necessity.” Larger firms that can scale have “perfected that model” and outsourcing also helped that growth. Roley added that “when [firms are] growing they can use technology to scale and protect the profit margin, and when times are leaner, they can use tech to not lose money.”

The survey also found that labor cost is more expensive at a small firm, 27 basis points verses 11 basis points at an extra-large firm, and investment teams usually were 50% to 70% of total labor costs.

Activity metrics at larger firms were much higher than at smaller firms. For example, reconciliation took 80 hours on average at an extra large firm verse 30 hours at a small firm. Reporting took 80 hours at an extra large firm verses 40 hours at a small firm.

Roley attributed this differential to a function of volume. “Bigger firms may have bigger average account sizes and more accounts, so it’s purely a volume issue. They may be serving clients from multiple countries or different net worths so the packages they create are different. Not one size fits all so it’s not just a scale function,” he said.

Another area that has “plateaued” in the past two years is use of social media. That said, brand building and expert commentary are still the two main factors in using social media. Roley said it most likely has to do with compliance issues and “rules around retention of communication.”

He added that firms have been using tech tools that enhance the user experience and resemble social media without the compliance issues. “For the end user, it looks just like a social media scroll of investment performance and risk information … so social media is influencing the user experience in other ways,” he said.

— Read Will AdvisorBid Become the ‘Facebook’ of Wealth Management? on ThinkAdvisor.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.