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Tech Decisions for 2021 Start to Add Up

'To spend or not to spend?' That will be the question asked by all advisors looking at their 2021 tech budgets.

By April, Christopher Haigh knew that the time had come to start his own firm. He’d been working at Northwestern Mutual since he was a college intern and for the past eight years he had been living with their technology decisions, paid for by his payments to the broker/dealer.

With independence on his mind, Haigh began shopping around for software for his firm, Iconoclastic Capital Management in Rochester, N.Y., which he launched in August. “For so many years I never really had any choice in my technology,” he said. “It’s nice to own it yourself. To have control over it.”

Armed with a tech budget of $1,000 a month, he was doing more than starting a business; he was bucking a trend.

In increasing his tech overhead this year beyond what he was paying for through his broker/dealer, Haigh became an outlier in the $21.2 billion analysts expect wealth management professionals to spend on IT in 2020. That’s because across the industry, researchers aren’t expecting tech budgets to increase; rather, they see a 3% reduction in IT spending.

In fact, most firms aren’t expected to begin returning to pre-pandemic spending patterns until the middle of next year, according to one prevalent scenario in a Celent report entitled “Wealth Management Technology Forecast 2020.” The current year has proven historic for adoption of some technologies and the firm analyzed and projected three scenarios for 2021 and beyond.

With so much uncertainty around the global pandemic, the firm said the “default” scenario for wealth management firms will be a budgetary holding pattern into next year, when the financial picture around COVID-19 is clearer and spending returns to more normal patterns by midyear.

One scenario saw IT spending getting on track as soon as the end of 2020, after recovering from an initial pandemic-catalyzed freeze. The other saw an extended period of economic turmoil dragging into 2021 with IT spending rerouted to core business activities and not accelerating until later in 2021 and into 2022.

Looking further out, from 2021 through 2023, the firm expects a compound annual growth rate of 5% in IT budgets across the industry.

Not only is Haigh spending more on tech this year than last, but he’s budgeting an increase in 2021, too. Hoping to gross $300,000 to $350,000 in 2020, he managed around $30 million at Northwestern Mutual and is still in the process of transitioning clients.

“Right now, I am paying for 13 different subscriptions,” he said. “I would not be surprised if that increased to 20 a year from now.” Haigh is earmarking around $15,000 for tech costs in 2021 and aims to keep his tech spend around 5% of revenue.

He isn’t alone in diverging from analysts’ forecasts.

Oakview Wealth Solutions, based in St. Charles, Mo., is another firm that’s seen its tech spending jump in 2020, compared with 2019. The two-person firm, led by J. Stanton Burns, gets roughly half of its revenue from management fees on $10 million in assets it manages, with the other half of its revenue coming from hourly and fee-based work.

While tech stack consolidation at Oakview Wealth Solutions brought some savings to the firm, business growth in 2020 and the addition of marketing automation technology provided by Snappy Kraken pushed tech spend up at the firm. Today Burns is spending roughly $9,000 a year on technology, up from roughly $6,400 a year ago. The firm’s tech budget in 2021 is expected to remain the same, he said.

“I love everything that I’ve got and I’m comfortable with it,” he said.

Larger firms are different. Dynasty Financial Partners, which has $50 billion on its platform, according to a spokesperson, is standing pat on its tech budget in 2020.

The firm was in the midst of a preplanned move from New York to Florida when the pandemic struck the U.S. With the groundwork already in place to make the firm functional in a multilocation environment, investments in technology to facilitate remote working and virtual meetings were already budgeted, said Ed Swenson, COO at the firm.

The firm is spending the same in 2020 as it did in 2019, he said. “If anything, we’re willing to spend more,” he said. “We all have to start operating like we’re digital companies.” While real estate costs may see cuts, the tech budget will remain unchanged in 2021, he added. “It’s an investment. It’s a key differentiator.”

Like Dynasty, Private Ocean, which tallies $2.1 billion in assets and 16 advisors, according to a spokesperson, found itself in the midst of a previously planned tech initiative that left tech spending largely locked in in 2019 and 2020. “When we adjusted the annual budget in March, I left tech spend alone,” said Greg Friedman, founder and CEO of the firm. “I didn’t have to keep the tech spending at the level that it was. It was a choice to keep in there.”

Normally the firm spends around 4%-5% of its revenue on tech, but it’s currently in the 7%-8% range, he said. Next year, the firm will see tech spending that’s approaching more “normal” levels, he added, but that’s more related to large projects wrapping up than intentional choices about budgeting.

Like Dynasty reevaluating real estate, Private Ocean was able to find savings in conference and travel budgets, allocating some of those funds to its tech budget. Still, he noted, profitability has been impacted by the coronavirus pandemic and some advisors have been caught off guard. “Advisors or firms that didn’t have the tech or weren’t set up for it had a bigger challenge,” he said. “It’s not that advisors couldn’t make the transition, it’s just that no one has a choice now.”

Meanwhile, tech spending at Carson Group, which grew to $12 billion in AUM in February across 304 advisors, 36 states and 25 Carson Wealth offices, according to a spokesperson, closely mirrors the default case made by Celent.

The financial services firm took a hard look at its budget earlier this year and decided to make some cuts to its tech budget, said Teri Shepherd, president and COO at Carson Group. By reallocating some of its budget to lower-cost tech providers and reducing money spent on external development, the firm trimmed “about 8% overall” on its custom development costs, she said.

Despite its reworked budget, Carson did not break its Carson CX commitment. Last year the firm promised to pay tech costs for advisors with Carson’s partner firms and it delivered on that promise, she said.

Looking ahead, Carson expects to cut 5% off the first half of its 2021 budget, but even those cuts might not be permanent. They’re more dependent on the state of the market, she added, not the likelihood of a vaccine or treatment to head off the coronavirus pandemic.

“The annualized cost might not be back to regular normal, but I would expect the second half of the year to be back on track with our overall 12-month spend,” Shepherd explained. “We don't intend on slowing much down. We’re doing our planning for 2021 right now, but we’ve got some leeway where it may just go back to regular spending.”

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