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Wealthtech Lessons Learned From 2008

There were no 'innovation labs' in 2008, and there may be fewer going forward. As the next recession looms, wealth management firms will likely return to a stricter cost-benefit analysis for their technology budgets.

As volatility rocks our industry and mandatory quarantines impact our daily lives, there will soon be a time when wealth management firms must react and rechart their course in our new shared reality.

If a global recession does take hold—which seems quite likely—what should wealth management firms do about their technology and innovation budgets? 

Let’s begin with George Santayana’s famous quote: “Those who cannot remember the past are condemned to repeat it.” And while the true impact of our global health and market crises are not yet known, there are things that can be learned from past experience.

Twelve years ago, headed into the 2008 recession, technology spending and innovation considerations were largely project-based. There were very few “innovation labs.” Fewer executives with titles like chief innovation officer or chief client experience officer. Wealth firms, including the one I worked for, had a strong focus on “return on investment” for technology. The cost of any project needed to have a measurable benefit to revenues and expenses—a specific benefit to the corporate bottom line.

Concepts like “enablement” or “transaction efficiency” were occasionally heard of but not broadly adopted. With few exceptions, wealth executives continued to see their marketability and client value proposition based more on pricing and product and less on client experience. Technology was an expense that needed to be controlled. Not something driving client behaviors or having a material impact.

It was in that light that many wealth firms (both large and small) took significant steps backward in the recession of 2008, shifting focus away from some lines of innovation, especially client and advisor digital projects. Many long-term and (potentially) transformational projects were canceled, shelved or significantly reduced. Technology staff were let go and eventually replaced with more “variable cost staff augmentation” programs, i.e., consultants. The lack of continued investment from wealth firms torpedoed several emerging wealth technology vendors (for example, Michael Cagney’s Finaplex and Northstar Systems), which resulted in diminished choices when firms eventually reopened their wallets.

That lack of investment on the part of wealth management firms can explain (at least in part) the early attention given to stand-alone automated advice platforms, or so-called robo advisors, which filled in the digital void experienced by frustrated and underserved investors.

The challenge of 2020

Depending on the severity of our current crisis, we can expect to see something similar to this over the next few years: Tech budgets and discretionary spending will contract. We have no reason to believe that the current set of constraints will elicit different outcomes. 

However, we contend that the impact of these decisions will carry far more impact and potential damage (or benefit) to individual firms. Clients are far more reliant on their technical connection with their advisor than they were 12 years ago and will continue to expect better experiences, lower friction, increased tools and insights than they had the year before. The challenge for wealth firms in 2020 is to find a way to continue being competitive with their technology while being financially responsible to their investors and stakeholders. 

Here are some ideas and concepts that we’ve seen work very well in the past and should provide some insight into what not  to do: 

Question One: Are you currently spending more/less than you should on tech?

Strangely, this question elicits the most blank stares for us. Most wealth executives simply don’t know the answer and there aren’t great benchmarks for the “how much should I spend” question. At F2 Strategy, we use two benchmarks for this assessment: 

  1. What’s your tech-to-advisor ratio? There is no “right” answer for this and the means to calculate it will vary firm to firm, but in general so-called average firms spend $50,000 to $60,000 per advisor per year on the tools supporting advisor functions (prospecting, CRM, port construction, trading, reporting, ops automation, etc.). If you’re spending less than that, you’re probably already well behind your peers. If you’re spending more, you may have opportunities to be more efficient. 
  2. What percentage of your company’s operating budget is dedicated to net-new innovation and improvement? Likewise, there is no “right” answer and firms will account for technology in many different ways, but we’ve found that most forward-looking wealth firms are spending approximately 15%-20% of their operating budget on being better, faster, more digital and less friction-filled. Highly innovative firms score well above that. Well-known laggards spend less. 

Question Two: Where to cut and where to double down?

  1. What technology currently makes a difference for your firm? This is probably a great time to remind yourself that technology cannot make you great at everything. We see far too many firms thrash about, chasing every new fad or deploying overlapping technology. Most struggle to be mediocre at best.

Conversely, the best wealth firms we work with find two to three capabilities they want to be great at and spend disproportionately on those things. Capabilities that fall below the line are less consequential to the strategy of the firm and are probably the best candidates for reducing expense or delaying enhancements.

By sticking to an intentionally small number of areas, it helps the firm maximize the benefit and adoption of their tools. It ensures that new tech will fit more neatly into the daily lives of their employees. Last, it’s more likely that clients experiencing the new capabilities will see it as amplifying your value proposition by making you better at the few things they likely are staying with you for.

For example: if your firm has a well-oiled process for managing tax-optimized, low-cost portfolios for $1-$5 million AUM clients, and you are thinking about adding a new financial planning tool—which nobody in the firm would know how to use or incorporate into their client experience—it might be a good project to put on a back burner. Conversely, a new performance system that can show the after-tax benefit of all the trade and rebalancing work you do could be a great project to continue with. 

  1. What’s your current technology cost structure and is it aligned strategically with where you want to go? In many firms, the tech team that got them to where they are sadly is not the team to get them into the future. In other cases, technology staffers are overseeing aspects that can be outsourced at a lower cost and (in some cases) with better results. Examples of outsource opportunities include:
  • Performance Reporting/Recon & Tool Configuration. Many performance reporting vendors have outsourced services. Others (like Mirador) have performance support teams that scale very well. 
  • MSPs (Managed Service Providers). For smaller firms that (rightly) worry about data security, tech support, desktop configuration and systems/data connectivity: hiring a firm that specializes in running the tech day-to-day can be a great option. Costs can be competitive and may offer the types of support enjoyed by much larger firms.

Outsourced (fill in the blank) firms. OCIOs, OCMOs, OCFOs (and soon OCTO) are growing in popularity, especially for smaller firms that need fractional access to great insights and decision-making.  

Guidance on Making Great Decisions About Wealth Technology

As a team of former wealth executives who are now helping wealth executives make great decisions, F2 Strategy has a keen sense of what decisions are likely to pay off and those that will be regrettable. Our guidance for clients right now is to make sure that your actions allow you to be competitive and relevant when the dust settles. Critical projects that allow you to deliver on the needs and expectations of your clients (especially those that allow remote access to information, actions/approvals and interaction with your advisors) should be continued. 

If you are one of the firms that’s forgone investment in your technology and do not currently offer these, we strongly encourage you to seek help and plug those gaps before clients find another provider that meets their expectations.

Doug Fritz is president and founder of F2 Strategy, a wealth technology consulting firm based in the San Francisco Bay Area. Prior to starting the firm, he was CTO at First Republic Wealth Management and senior vice president and head of strategic tools and processes for Wells Fargo Wealth Management.

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