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Practice Management > Building Your Business

Why It Pays to Take a Closer Look at Technology

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What You Need to Know

  • With the abundance of technology available to RIAs today, advisors have many options available to them to enhance their revenue, profits and valuations.
  • The primary goal of enhanced technology is to expand client services and advisor capacity.
  • Technology can be a force multiplier when it comes to raising a firm’s valuation.

Advisory firm valuations have risen sharply over the past year, driven in part by an abundance of funding and increased buyer competition.

Technology firms that support financial services have responded to this demand with technology innovation. We are seeing tech firms consolidating and expanding their service offerings to meet the demand, and this is benefiting financial advisory firms.

With the abundance of technology available to RIAs today, advisors have many options available to them to enhance their revenue, profits and valuations. This is good news for expanding advisor capacity, productivity, and service to clients.

Technology can act as a catalyst to increase a firm’s value by driving operating efficiencies and helping to create a superior and unique client experience. For many firms, the question is not whether to invest in additional technology, but to identify which kinds of technology will yield the greatest improvements in efficiency to increase revenue and profits.

Not all technologies are created equal, however. The primary goal of enhanced technology is to expand client services and advisor capacity. But depending on the firm’s size, structure and client experience, some technologies can hurt a business by making operations more complex than they need to be.

Making Informed Decisions

As industry technology expands, advisory firms must take more time in making informed decisions on what to integrate and what to ignore. The goal with tech is not to get the bright, shiny new thing.

Instead, firms must look at what technology can gain them in revenue, profits and ultimately valuation. And sometimes, integrating not-so-exciting technology can work miracles in expanding revenue, profits and valuations at the same time.

Here’s how to break down the decision to buy, implement or create new technologies that can enhance your firm’s performance, using return on investment as the guide.

Driving productivity. Making your team more efficient and increasing its capacity is often the best way to begin to use technology. Adopting software to reduce operational costs is a clear-cut way to increase profitability, and it can modestly increase valuation.

The goal is to implement better client relationship management software, data gathering software solutions, or both. Much of an advisor’s time and capacity is wasted on gathering data. If an advisor has incomplete data and spends a lot of their time chasing down client data or having more meetings than necessary to obtain it, it eats away at the business profit margin.

This problem can be solved by equipping advisors with data gathering solutions that save time.

These can include, but are not limited to, risk evaluation software, client intelligence software, portfolio management software, data gathering and onboarding software, and client portals. Such software solutions can help advisors give more effective advice and help firms expand their capacity.

When advisors have more data and information about a client, they can guide the client faster and be more available to help them with behavioral issues. Technologies like these return on the investment by expanding the capacity of an organization’s advisors, which will enhance profit margins.

Widening a target market. Once a firm expands its profits through increasing advisor capacity, it can enhance revenue by widening its target market. In other words, more and different types of clients can be served when a firm has the capacity to serve more clients.

Technology can help firms expand their client types to increase revenue. For example, firms that focus on the high-net-worth market might find those clients, over time, referring friends and family members who are mass-affluent or ultra-high-net-worth.

By implementing software to cater to a wider target market across multiple segments, firms can ensure lower operating costs on these smaller accounts and provide more customized service on the larger accounts.

Such software might include aggregation software and financial planning software used directly by the client. If a firm focuses first on technology that enhances advisor capacity, as mentioned above, we free up capacity to serve more clients and add tech that clients can use.

As a result, by decreasing the operations to gather data and giving tech for clients to participate in their own financial planning, we increase the client profitability. Doing so makes serving smaller (and larger) clients profitable.

Firms expanding to serve mass-affluent clients might need time to increase their scale before maximizing the profitability of that segment.

But ultimately, technology investment can help raise the ceiling on a firm’s number of accounts, assets under management, and revenue, thereby expanding and driving their revenue. Investing in technology to expand a target market can yield a significant valuation increase.

Maximizing valuation. Advisory firms can expand their valuation the most by building and integrating their own technology. This option is not for every advisory firm, and firms that do it require a commitment to growth and innovation.

Whether it is micro-tech, such as an online workbook or risk assessment tool, or broader financial planning technology, tech built to accommodate and enhance a firm’s client experience can yield the highest valuations and set the firm apart in the marketplace.

Proprietary technology helps support a unique service offering to clients and allows expansion to serve all types of clients. This kind of technology commitment can drive scale and revenue the most, while decreasing operating costs, because the tech is usually catered specifically to the firm’s client experience.

Building your own tech eliminates any “workarounds” a firm might have to do to deliver their own client experience using technology that is purchased directly from a tech company.

In the past, investment in priority tech came at a steep price. Today, we are seeing a movement to more available options for advisory firms to innovate their own technology at a lower cost. While building your own tech can be an investment, it often does return the most in valuation.

But there is an important caveat: An investment in building your own tech takes time and money. It is quite common for advisory firms to offset that cost by licensing their in-house technology to other firms to recoup these costs.

And while that does create added revenue, it does not maximize valuation because now firms are selling their client experience to their competitors. In these cases, advisory firms selling their client experience are now competing with other firms for clients under the same client experience.

Many firms believe this is a recipe to attract firms they can potentially acquire, and in some cases it does work.

But selling your own house-built tech and client experience to attract inorganic growth opportunities only delays a decision to sell. Why not keep your client experience for yourself and your clients, and use it as a catalyst to help move forward on an acquisition?

Selling tech to your competition only dilutes the value of your tech investment. Keeping it for the benefit of your advisors and your clients, and getting other firms excited about joining your firm for the benefit of your unique experience, is a more effective way of making an acquisition happen.

When used as part of a well-thought out strategy, technology can be a force multiplier when it comes to raising your firm’s valuation.


Angie Herbers is an independent consultant to the advisory industry. She can be reached at [email protected].


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