RegentAtlantic Capital was ahead of the game. In 1996, the fee-only RIA in Chatham, N.J., went paperless — a move that put it a decade ahead of its peers. RegentAtlantic manages $1.8 billion in assets for about 900 clients, and when the firm moved offices, Christopher Cordaro, a Regent wealth manager, checked out the cost of buying a copier. He couldn't believe how expensive it was. “Why do we need a copy machine anyway?” Cordaro remembers asking himself. He decided to check into document imaging instead, and found it didn't cost that much more.
While RegentAtlantic was one of the pioneers of the paperless practice, the process of scanning documents and storing them using document-management (DM) software has finally taken hold of the mainstream in the brokerage industry. There isn't any industry-wide data, but there is plenty of anecdotal evidence. Independent b/d Commonwealth Financial Services, for example, recently polled its own affiliated advisors, and found that one-third of them store their paperwork electronically. These days, most brokerage businesses almost never send paper to the home office, says Darren Tedesco, director of business systems and strategic development at Commonwealth. “The entire process has moved to paperless. From the advisor's office, to Commonwealth's office, to the clearing firm — it is all straight through processing with no paper at all.”
It's no great wonder firms want to institute paperless solutions — there are many benefits for firms in terms of efficiency, cost-savings, accessibility and security of information, as well as regulatory compliance. For example, the same day a client joins RegentAtlantic, the firm scans their documents, and sends the originals home with the client. Instead of hunting down files when a client calls, Cordaro says they are able to address the client's questions on the spot. “It raises productivity, and it means much better service for the client because they get results right away,” he says. Not to mention the firm saved $7,000 by buying a $3,000 scanner instead of a $10,000 copier, according to Cordaro, and each wealth manager saves at least 10 minutes a day that would otherwise have been spent retrieving paper files. In all, he estimates that the savings add up to $42,000 annually.
While some RIAs like RegentAtlantic have come up with their own solutions, other RIAs are getting help from their custodians. “Whenever advisors make any sort of technology-purchase decision, they typically rely on their peers, word of mouth, or they might read an article or something,” says Timothy Welsh, a CFP, and president and founder of Nexus Strategy, an RIA-consulting firm. “But a number of the custodians, such as Schwab and T.D. Ameritrade, have technology people in the field, and they are sort of aggregators of best practices, so they can be a pretty good resource for advisors.”
There are also benefits to going paperless at the b/d level. Raymond James' home office began document imaging in 1991, and three years ago it extended the technology to its branches. In February, Raymond James selected BlueThread Technologies, Inc., a provider of Microsoft SharePoint-based Enterprise Content Management (ECM) solutions to enhance paper-based processes, including the opening of new accounts. Now it's easier for the firm to keep track of its branch activities, while the branches have cut down on the time they spend submitting documents to the home office.
“If you think back 10 to 15 years ago, much of the fact finding, risk mining and data mining occurred when you went out to a branch office,” says Kip Karavick, head of compliance at Raymond James. “While there continues to be a requirement for b/ds to visit branch offices, the significance of that trip is decreasing over time because having things in electronic format means you can better determine where your risks are,” he says.
Ultimately, though, most b/ds leave it up to advisors to decide whether or not they want to go paperless, or if they want to take advantage of the firms' paperless offerings. For example, one advisor from LPL Financial, who wished to remain anonymous, says he is thinking about getting an in-office scanning system even though he uses LPL's iDoc system (LPL's document-management solution) to load basic account documents to the firm's server. “I don't more fully use iDoc because, while convenient, it's also another hook my b/d would have in me, and I want to make sure if I have to move, that it's as painless as possible,” he says.
THE PAPERLESS PROGRESSION
“You can't just jump right into it,” says Tedesco of going paperless. For starters, while paperless ultimately saves you money, it doesn't come free — there are short-term costs (those required to convert your office into a paperless one) and long-term costs (scanner upgrades and marginal ongoing human-capital costs).
Take Carter Financial Management, a financial advisory firm in Dallas, Texas affiliated with Raymond James Financial Services, which started the transition to paperless processing in 2003 (before Raymond James had come up with a firm-wide solution). Chris Peay, the IT and database administrator at the Dallas firm, says it would have taken the branch's scan manager years to image all of the old client files. So they outsourced to a scan company, which turned out to be pricey. Carter manages around $850 million in assets, with more than 35 employees and 11 CFPs (including satellite offices). While the original estimate for scanning the files was $15,000 to $20,000, Peay says the price soon soared to $60,000. “Lesson learned — get everything in ink — exactly how much it is going to cost — before starting,” he says. Peay says the firm decided to work with digital-document software offered by Laserfiche, which cost the firm close to $20,000. The firm then shelled out another $15,000 for Lasherfiche's advanced auto-import scanner, and $5,000 in maintenance costs per year. In all, the total cost came to about $100,000.
It's important to do your research when it comes to what scanner and DM software to buy (see table, “The Trail to Paperless”). While larger firms like Carter Financial Management might need more robust solutions like Laserfiche to handle a heavier document load, small firms should beware of being “upsold” by big software companies. In some cases, small firms can get by with a modest scanner and some simple software. Bryan Kelly, principal of Kelly Financial Group, a fee-only RIA in Bel Air, Md., which manages $140 million in assets, says he read about going paperless in a book about efficient office practices. At the time, Kelly says his firm managed just $25 million; Kelly chose PaperPort, a basic document-management software program that can work well for smaller firms.
Once you've got the technology down, you've got to think about workflow and processes, say advisors. JFS Wealth Advisors, which has 10 advisors and 20 other employees, and manages $836 million in assets, first looked at paperless solutions in 2004, but it wasn't until 2005 that the firm actually made the conversion. Laura Blaire, the firm's administrative officer, says JFS spent a year building a system that would be sustainable over time, and compatible with the firm's growth. Cabinet NG software cost JFS roughly $30,000, and Blaire says the return on investment was high: “Look at the time saved not searching for files, being able to access the system remotely, not having to pay someone to put the file folders back in the cabinets, and not having to purchase and house additional file cabinets.”
Beyond efficiency savings, going paperless also safeguards documents from natural disasters. “At a one/two person operation, suppose there's a fire, and all of their documentation was located there on paper and there was no remote backup,” says Leonard B. Kruk, a self-styled technology “futurist,” and president of Naples, Florida-based Leonard Kruk Consulting.
THOU SHALT NOT SHRED
There are also considerations (read regulatory and compliance) to take into account when setting up a paperless workflow system — from the requirements of the software to the shredding of the original documents. There are multiple layers of rules, whether these are federal and state regulations, or your firm's own compliance requirements. “There has long been a debate in the industry about what you have to do to prove to auditors or regulators that electronic records have not been altered, and the safest approach would be to use software that allows you to prove it was not altered,” says David Drucker CFP, editor of Virtual Office News.
In 1997, the SEC amended document-retention rules (covered by Rule 17a-4 of the Securities Exchange Act of 1934) to allow b/ds to store records electronically, as long as the technology preserves “the records exclusively in a non-rewritable, non-eraseable format.” Also known in the software industry as “WORM” (write once, read many), this kind of computer-storage media ensures that documents are immutable, and cannot be changed in any way, shape or form once they have been converted to an electronic format. FINRA has it's own rule for books and records — NASD Rule 3110 — but it essentially requires members to comply with SEC rule 17a-4. The same rule applies to registered investment advisors governed by the Investment Advisers Act of 1940. All in all, SEC regulators say the rule of thumb is that electronic is okay across the board. However, not every document can be shredded.
“In principle, courts do not take kindly to shredding of certain kinds of documents — those which have been notarized, or those with a raised seal,” says Tedesco. “Some of these nuances will likely keep most advisors from ever being entirely ‘paper-free’, and instead they will have to settle for being ‘paperless’ — literally having less paper.”
There's one final benefit of being paperless: When it comes down to an actual audit, having a paperless office “changes the tone of the audit” for the better, says Welsh. “If the auditors come in and have someone hand them a DVD (with all the records requested) versus going to a firm that has 40,000 boxes of paperwork scattered around that took them three weeks to put together — what are they going to think about that firm?” He says having a system in place is powerful evidence that a firm is compliant. For example, when the SEC audited RegentAtlantic in 2001, Cordaro says it was the easiest audit the firm ever had. After printing the records out for the auditor, Cordaro also saved a copy of the files in a separate folder on the network server. “I got a call from the examiner in October 2001. She asked apologetically if we could possibly reproduce all of the documents so she could pick them up — her office was destroyed with the World Trade Center on 9/11 and so were our documents,” Cordaro says. “I said, ‘No problem I can FedEx you a CD with all the documents if that's easier.’ She was thrilled!”
THE TRAIL TO PAPERLESS
So you've decided to go paperless. Here are some questions and considerations to get you started:
Will you be selective about the documents you store electronically, or will you go back and scan everything?
In what order will you scan documents? Some firms choose a start date and then work forward; others go back one year at a time.
Who will do the physical scanning? A lot of advisors hire temporaries, rotate different staff members into the job, or even outsource to minimize burnout. After all, if you have a lot of “legacy information” as they call it, the physical scanning process could take as long as two years, depending on the number of records involved.
Do you need to buy your own digital document-management software, or can you use your current customer-relationship management program (CRM)? (The best CRM programs have the capacity to attach paperless records and files to each client's record.)
Do you want to store your paperless archives online, or in the office on your server?
If your new document-management software doesn't easily converse with the other software programs you use, you might need to get some help with integration. Visit http://www.yoursilverbullet.net for more information on the consortium of companies that work together to integrate their software.
Finally, ensure that all of the information you convert to electronic format is backed up, preferably with two backup systems — both online and on an external hard drive.
Source: David Drucker, CFP, editor of the monthly newsletter Virtual Office News.