Cloud computing is evolving quickly from a vague abstraction to a practical, near-term information technology reality for independent financial advisors.

In general, cloud computing offers more economical, flexible, and secure data processing and storage than traditional on-site methods. Yet many advisors still lack a fundamental understanding of how their operations and, ultimately, their clients might benefit from moving their systems to "the cloud."

When asked to describe cloud computing, many advisors would offer a simple definition along the lines of, "using technology beyond the walls of my office." While this is correct, Wikipedia offers a more succinct definition: "Internet-based computing whereby shared resources, software and information are provided to computer and other devices on demand, like the electricity grid."

The grid analogy stems from the fact that in the early days of electricity generation, factories needed to generate their own power-a highly inefficient system. With this setup, some factories had excess generation capacity that was wasted, and others had regular demand for greater power than they could generate.

The advent of the power grid (and the utility companies that fed it) allowed many users to amortize the cost of high-capacity generation equipment, and let them obtain-and pay for-only as much electricity as they needed at any particular time. In a similar fashion, true cloud computing features these essential characteristics:

* Off-site base. The service originates beyond your walls, and that site is owned and operated by the provider.

* Elasticity. The level of service provided can scale up or down rapidly, an important capability that few advisory firms have. This flexibility is not only useful for basic capacity issues, but also for rapidly incorporating new technology.

* Self-service provisioning. Most resources, including different applications-email services, Google Apps, Zoho, NetDocuments-are available on demand online or by phone.

* Broad network access. Services are accessible through advisors' networks according to their needs. That may include not only basic desktop systems, but also laptops, tablets, smartphones and perhaps, ultimately, TV sets.

* Flexible billing. Services can typically be paid for on a metered basis (you pay for only what you use), a fixed-subscription all-you-can-eat basis, buckets of usage (like cell phone plans) or cable TV-style tiers of service arrangements.

* Multi-tenancy. Because the cloud-based service provider has many customers, it must have safeguards in place to protect the security of each tenant.

* Interoperability. Systems can be structured to work with all types of software. Note, however, that cloud computing services are not necessarily "open;" the host retains the right to approve or reject parties who request access.

The Benefits

One major advantage of cloud computing is that it's ultimately cheaper than traditional computing, thanks to economies of scale (for both the cost of the equipment and the experts who maintain it), and real estate costs (server farms can be located in remote locations where land is cheap). Additional advantages of cloud computing include:

* Rapid deployment

* Low initial cost

* Access to highly trained IT pros who know the applications you use

* Redundancy (backup)

* Disaster recovery

* Security

Advisors don't need to be reminded that security is of crucial importance to their business success. When thinking about this issue, advisors must consider both the physical security of their computing hardware, as well as protection from external (or internal) hackers. In this regard, cloud computing vendors worth their salt locate their equipment in a protected physical environment, use strict access protocols and deploy extensive threat-detection tools within the software and network.

Not all Roses

It's important to note that cloud computing requires more telecommunications bandwidth than a typical office may already have in place. In addition, it is best if offices embracing cloud computing have redundant internet "on-ramps"-a capability that might be elusive for communities that lack multiple internet service providers.

But for many advisors, these challenges aren't enough to outweigh the benefits of a cloud-computing model. For those advisors, there are currently three basic service models available, a number that's bound to increase soon in this highly dynamic field. (Although advisors typically will tap into the cloud via intermediaries that choose among these models, advisors should understand which route the intermediaries have chosen.)

The Options

One model is infrastructure as a service (IaaS). As the name suggests, this model involves the delivery of computer hardware for processing and data storage, as well as operating system software and virtualization technology to optimize resources. This model is well suited to the peaks and valleys of processing power needs-particularly the peak when quarterly performance reports are being generated. Vendors in this space include Jungle Disk, RackSpace and Amazon.

Another model is platform as a service (PaaS). This features hardware plus programming language, utilities and possibly underlying applications. Developers using PaaS can deliver applications for advisors over the cloud without investing in servers, networks and development software. PaaS examples include Google Apps Engine for Business and the Windows Azure platform.

The third model, software as a service (SaaS), is perhaps the most fully developed and familiar to advisors. It features applications on demand. For example, in the customer relationship management (CRM) arena, vendors, including Salesforce, Oracle and Sugar, all offer SaaS-based applications.

Advisors considering purchasing and harnessing the software applications they use via the cloud need to be sure that the different applications know how to "talk" to one another. SaaS-based vendors that do have that capability include MoneyGuidePro, Redtail and Orion.

Another SaaS option for advisors is a third-party consolidator. One example is Tamarac Advisor X, whose components include Portfolio Center, Performance Engine, Dynamic Reporting, Microsoft CRM and integration with MoneyGuidePro. A variation on this theme is the all-in-one category, which includes vendors such Interactive Advisory Software.

Meanwhile, the major custodians used by independent RIAs, including Fidelity, Schwab, TD Ameritrade Institutional, Pershing, Trade PMR and the Trust Company of America, have been introducing and improving on their own cloud-based solutions that enable custody clients to run a suite of applications on an integrated basis. How this process works will vary by custodian, and advisors would be wise to explore the various options their particular custodian(s) offer.

Looking down the road, it is highly likely that most applications advisors use will live on the cloud, and desktop-based applications will die out. And even if advisors don't leap for the cloud right away, chances are the software vendors they are currently using will be doing so-if they haven't already-resulting in greater value to their customers.