Would you like to boost your revenues by 30%? (Who wouldn't?) Many investment advisors are missing the possibility of growing their businesses, increasing client face time and saving on staffing costs. All it takes is a forward shift in how they employ technology.
The key is moving away from a disjointed collection of software applications throughout the office to an integrated technology solution. An integrated approach allows advisors to increase their focus on business development and client management.
RIA Technology Integration: The True Opportunity Cost of Inefficiency, a research paper based on a national survey of RIAs, quantifies the potential gains. The survey was conducted by the research firm Aite Group and commissioned by NFP Advisor Services Group. The Aite Group interviewed 146 RIAs, about two-thirds of whom run hybrid rather than fee-only businesses.
This study compared the experiences of advisors at three points along the road to integration:
* Soloist. The advisor installs software and does everything in-house. This approach is followed by half of the survey's advisors.
* Experimenter. The advisor tries new solutions, such as software hosted outside the firm, because going it alone doesn't work. This approach is used by 35% of respondents.
* Integrator. This integrated outsourced approach is used by 15% of advisors in the survey.
Consider the gains made by an average RIA with $100 million to $500 million in assets under management and an average of 2.5 employees. When a firm shifted to integrator from soloist, the survey found it gained an annual average of 85 days for client acquisition and prospecting, as well as 29 days for client management (see the "More Face Time" chart above). The impact on a firm's assets and profitability is obviously substantial.
A $1 million producer could become a $1.3 million producer as a result of freeing an additional 85 days for client acquisition and prospecting, assuming the $1 million producer continued to generate $3,846 per working day ($1 million divided by 260 working days per year). The upside of integration can supercharge an advisor's business.
The benefits go well beyond new business development, however. On the personnel front, integrators halved their need for operations staff (see the "Fewer People" chart below). The average soloist employs the equivalent of 2.1 people on tasks such as computer data reconciliation and exception handling. The average falls to 1.8 people for experimenters.
There's a more dramatic decline with the move to integrators, who average only one person for these tasks. As the survey shows, this makes it possible for RIAs to manage growth without adding staff.
Integrators also improve the speed of their processes, improving profitability and client service. For example, they bill clients quicker, which naturally leads to faster inflows of client fees.
The tedious tasks of performance reporting and portfolio rebalancing also take less time. Reduced operations staffing requirements mean that modestly staffed integrators can redeploy their resources toward growing their businesses.
Moving to experimenter or integrator from soloist also cuts advisors' costs directly attributable to technology by more than 70%. Soloists spend an annual average of more than $30,000 on hardware, maintenance and data backup costs (see the "Cutting Costs" chart below).
Annual costs fell to an average range of $8,003 to $8,678 for advisors using the more sophisticated experimenter and integrator models. This results from the economies of scale enjoyed by companies providing services to RIAs.
WHY BE INEFFICIENT?
Aite found such dramatic improvements in costs and staffing partly because when advisors choose their technology solutions they treat the symptom and not the disease, resulting in less than ideal solutions. In other words, advisors tend to pick one software application at a time - solving the pressing symptom - without looking at their overall situation and how it contributes to the problem.
It's natural at firms with few employees to focus on the most pressing problems, such as performance reporting, financial planning and portfolio management. Other problems may be treated as afterthoughts.
This happens because firms lack resources dedicated to technology. At all but the largest RIAs, it is impractical to divert staff from their daily tasks to focus on important technology initiatives. Nor is it practical to spend lots of time or large sums buying various technology. Yet the lack of a big-picture approach condemns advisors to suffer from costly inefficiencies.
Notably, the RIAs surveyed acknowledged the need for technology integration, ranking it among the top three spending items related to technology. The need for integration also increases sharply once an RIA surpasses $100 million in assets. Growing RIA firms could benefit by upgrading to integrated technology before they hit this asset milestone, avoiding a cumbersome technology transition.
Perfection is often the enemy of progress. When advisors combine solutions that seem perfect in isolation, they run into serious problems. The benefits are outweighed by the hassles of getting diverse systems to work together.
For example, advisors have made significant investments in a robust trading technology, only to find the reconciliation and accounting are not fully compatible with their performance reporting system. Advisors would be better served by a customizable integrated solution that takes advantage of a larger provider's given economies of scale.
Also, until recently, such sophisticated integrated solutions haven't been broadly available, particularly for hybrid advisors who combine brokerage and fee business. These advisors may run a broker workstation separately from systems for their advisory business. This means they struggle with two sets of log-ins, passwords, custodians and more. However, as the hybrid model spreads, integrated solutions are improving to meet their needs.
Is technology hindering your business as much as it is helping it? Ask yourself these questions:
* Would my practice benefit from more time networking for new clients and servicing existing clients?
* Do I spend too much time managing systems as well as back-office staff and processes?
* Do I lack time to intensively study, analyze, apply and troubleshoot the latest developments in back-office technology?
If you answered "yes" to these questions, it's time for you to consider leveraging the strengths of an organization that understands technology as well as it understands your needs. Rather than struggle to create integrated solutions yourself, you should outsource this work and delegate technology and operations tasks to experts who can perform them with fewer headaches. In addition to technical expertise, external partners should have a corporate culture that is aligned with yours, a large client base to maximize economies of scale and be as commited to growth as you are.
Never outsource the core work you are best at. However, outsourcing technology to an integrated provider lets you avoid the responsibilities of being a chief operating officer, freeing you to focus on your most productive skills.
James L. Poer is president of NFP Advisor Services Group. For a free copy of RIA Technology Integration: The True Opportunity Cost of Inefficiency, visit nfpasg.nfp.com/whitepaper.