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Making Technology Pay Off For Wealth Advisors

Making Technology Pay Off For Wealth Advisors By Gregory H. Horn, ADVISORport, Plymouth Meeting, PA TO BE SUCCESSFUL IN THE FUTURE, individual advisors and wealth management firms will need to adapt their practices and adopt new technological tools. Those who are successful will be better positioned to reap the benefits of improved client relationships and more profitable practices. This business

Making Technology Pay Off For Wealth Advisors

By Gregory H. Horn, ADVISORport, Plymouth Meeting, PA

TO BE SUCCESSFUL IN THE FUTURE, individual advisors and wealth management firms will need to adapt their practices and adopt new technological tools. Those who are successful will be better positioned to reap the benefits of improved client relationships and more profitable practices. This business model integrates in-house and outsourced tools and delivers enhanced, mass customized services more efficiently to advisors’ clients.

"The computer revolution is the most advertised revolution in world history. Yet one of the funny things about it is that we probably still underestimate its impact." —Herman Kahn

The financial services industry is undergoing a revolution. Many market forces are conspiring to create challenges to financial advisors, whether they are independent or housed within large financial organizations, as they grow their assets under management. Problems such as the commoditization of their service offering, the total cost of owning technology, increasing competition, and client demands for access to better and more customized products are working together to stifle profit growth. In the face of these challenges, a revolution is taking place.

Surprisingly, relationships are at the forefront of this revolution. Although technology is the mechanism facilitating the transition in the advisors’ menu of services, it is the strength of the advisor-client relationship coupled with technology that is driving this sea change. Central to this revolution is the recognition by the advisor previously providing non-investment services of just how highly valuable their client relationships are. Successful advisors are finding better ways to improve their clients’ perception of the services they provide. This is accomplished through the use of automated tools and Internet technologies that enable them to outsource cost centers and focus on client development and communications. This article addresses an emerging business model that solves three of the major challenges faced by today’s advisors. Importantly, advisors adopting this model recognize it improves their services delivered, their profit margins and the value of their business.

The New Economy

Communication throughout history has increased the development of common knowledge and commerce. As each new major innovation in communication has been invented and accepted into society (printing press, telegraph, and television), the amount of knowledge and commerce that individuals engage in has increased.

PCs connected by the Internet are obviously one of the greatest communication tools ever conceived. With the Internet a completely new type of society is evolving thanks to its ability to personalize interactions on a large scale. The financial services industry is leading the way in which this new tool of trade is being exploited.

For fee-based investment advisors, who traffic in information, this tool represents both a threat and an opportunity. As information that was once brokered by exclusive distribution systems becomes available for free, the purveyors of that information find their franchises endangered.

Aggregation, filtration, and analysisof information become the primary opportunities for New Economy information brokers to "add value" to information and gather assets.

Just supplying data or access to services will not be enough for these providers to make sufficient inroads into the advisory market or even maintain current market share. Providing the plumbing isn’t enough.

The Challenge: The Cost and Implementation of Efficient Technologies

All too often, the fee-based advisor is distracted by what seems to be a never-ending process of selecting and maintaining hardware and software to improve productivity and accuracy, and ends up struggling to maintain the evolving infrastructure. As the advisor grows and becomes more successful, they are forced to transition their time from revenue-generating activities ("finding and minding") to overhead-laden activities ("grinding"). They become beholden to their back office where simply supplying the raw data becomes the focus of the enterprise and not the starting point of adding true value to the information. Moreover, the true cost (which includes productivity and opportunity costs) of the back office grows way beyond the obvious annual software, computer and staffing expenses.

A 1997 survey of independent RIAs by Russ Prince and Associates ranking time spent on their core activities illustrates just how pervasive the issue of Opportunity Cost is for advisors. See Chart 1.

Obviously, if most time is spent on Administrative matters ("grinding") while Prospecting, Selling and Relationship Management ("finding and minding") are squeezed in when there is time, how much revenue and profit growth is left behind (Opportunity Cost) for other advisors?

Software developers and computer manufacturers have provided smaller financial firms better tools to add value to information but have exponentially increased the amount of resources that must be expended to support a firm’s technology infrastructure. PC-based systems have created islands of information that are difficult to change, integrate, and support. Getting bogged down in the back-office management process is a death-knell to the growth curve of a successful independent firm.

On the other hand, many large organizations also suffer from their own form of operational paralysis. Legacy systems make it extremely difficult both logistically and economically to implement large-scale systems conversions. Operational process improvement and new product implementation projects take millions of dollars and years to complete due to the sluggishness of changing the inertia of a large company.

The Solution: The Internet

The Internet is creating new opportunities by lowering the barriers to the adoption and integration of new technologies to make firms more efficient. The Internet is making it possible to eliminate the cost of developing and maintaining office infrastructures from scratch by allowing teams that have mastered the "plumbing" to resell their processes to others and distribute them through the Web.

Internet technology has proven its security, flexibility, interoperability, and scalability and is gaining acceptance as a method of deploying productivity tools. Processing of back office data will be done in large data centers at third parties who will then deliver the information to thin clients (Web browsers) anywhere in the world through secure pipelines over the Internet.

The state-of-the-art technology today allows legacy systems that reside in different hardware platforms, operating systems, and geographical locations to be integrated into a single system with a common user interface on a Web browser. Systems have been developed with highly secure connections over the Internet that require users to login with a user name and password. From that single point of entry, a user’s experience can be completely controlled. This includes granting access to data that only they are allowed to see or access to specific functionality that can even restrict their ability to edit or append data in the system.

Fee-based advisors now have the option to outsource their back office by turning to third party solution providers who deploy their service offerings through Internet platforms. These third party solutions also provide a host of tools to manipulate and report on client data without requiring the advisor to invest in any infrastructure other than a PC with high speed Internet access, a Web browser, and a color printer. These new service companies are called Web-based Application Service Providers "ASP."

The Challenge: Increased Competition and Margin Compression

The fee-based market is growing more competitive. In addition to the independent registered investment advisors and brokerage firms, bank trust departments, accounting firms and law firms are entering the fee-based consulting space. Technology has the ability to empower these new entrants with strong client relationships to transition from delivering their traditional services to delivery of a broad array of financial solutions to their valuable clientele.

It has been estimated that as many as 66,000 CPA’s will enter the fee-based investment advisory market over the next five years. Law firms are also building registered investment advisory subsidiaries designed to integrate investment consulting services with traditional estate and financial planning services previously billed by the hour.

Therefore, traditional referral sources for advisors are now becoming competitors. The winner will be the investor as sources for consulting services grow in number and fees compress with this newly forming group of "providers." Large firms face growing competition to become more flexible, and small firms will be required to deliver more robust service offerings than fee-based risk profiling, portfolio design and manager selection, all at substantially lower fees than they currently charge.

The Solution: Outsourcing Non-Core Competencies

Tools are now available to leverage advisors’ core competencies and outsource their non-core responsibilities to outside enterprises who can do a better job. This frees up the advisor to become a pure knowledge worker selling the "intellectual capital" that resides between their ears rather than the data that flows through their networks. This business model also eliminates the opportunity costs that limits an advisor’s ability to deliver better services and grow their asset base exponentially. Accessing the newest, more efficient information technology, provided seamlessly through the Internet by a third party at no start-up cost, allows advisors to use their most effective skills full time. Moreover, this model can also lower their overhead and increase their profit margins while the late adopters are trying to learn the ropes and setup shop.

The Challenge: Demand for Better, More Customized Products

The inflation we have experienced over the past 10 plus years in the financial markets creates another challenge for the independent advisor. Whereas the large distribution systems may find gaining access to a broad array of investment products growing easier, the regional and small independent channels often find access limited as product providers narrow their participation across distribution channels and focus on the most lucrative distribution relationships.

At the same time, clients are demanding more from their advisors -- such as customized third-party investment products, and other services that supplement the traditional proprietary investment management services and inflexible pooled investment vehicles (e.g., mutual funds). Banks are also faced with this very issue as clients of their wealth management groups are barraged with financial service offerings and become confused. Advisors get an earful of questions such as, "what about this investment firm or that asset class?"

The product sources for small distribution channels have historically been third party providers who have built research and operations platforms from which to deliver a wrap-fee/separate account management solution. Often times, however, these providers offer little-to-no customization capabilities, minimize the relationship between the advisor and their client by promoting their own brand, and become too expensive in a compressed fee environment. These traditional providers will also be forced to change as fees compress and delivery requirements become customized and "real-time".

The Solution: Mass Customized Technology

The use of the Internet as a secure and mass customizable distribution methodology will facilitate many of these changes through Web-based ASPs. "Product" currently delivered on behalf of the advisor will be delivered via a "platform" by the advisor, with mass-customized reporting defined by the advisor to meet the preferences of each individual client. The advisor’s identity or brand will be promoted rather than that of the platform sponsor/product provider. Web-based ASP platforms will be used to deliver a myriad of other services ancillary to consulting services, but integral to the advisor/client relationship. Furthermore, the delivery of these expanded, more customized services will be done more cheaply than an advisor could do on their own due to the efficiency of the technology.

As more and more ancillary services are developed by Internet-based startups, they too will be aggregated into these ASP platforms to provide investment advisors more and more tools to help their clients.


Alvin and Heidi Toffler have eloquently written, in their book by the same title, about "The Third Wave" of civilization that is taking the world by storm. Manufacturing, the second wave, is waning as the primary method of generating wealth as the "New Economy" takes over. The "New Economy" is based on the wealth derived from adding value to information and is becoming a more lucrative endeavor than the creation of commodities — even investment commodities. Investment advisors who define themselves as knowledge managers (and not knowledge manufacturers) will be better positioned to reap the benefits of improved client relationships and more profitable practices. These advisors will conquer the challenges of tomorrow’s highly competitive and technologically intensive marketplace using a new business model. This business model integrates third-party, Internet-based platforms to outsource non-core competencies, yet delivers enhanced, mass customized services more efficiently to advisors’ clients. The end result is a highly profitable and valuable advisory business that has leveraged the true competencies and skills of the financial advisor.

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