Want a technology investment with a real payoff? Steer clear of hot Internet stocks.

Instead, make a technology investment of $100,000 in your own practice to boost your net business value by $1,000,000, the fee-only advisors attending NAPFA’s spring conference in Las Vegas heard on Monday.

“Leading firms are realizing that the more scale, capacity and efficiency they build into their firms, the higher the value they can monetize when they exit the business,” James Dario, TD Ameritrade Institutional managing director for product management and strategy, said in his keynote address to the conference.

If a medium-size firm with $1 million in annual revenue lowers overhead costs by implementing new technology, the savings drop to the bottom line, Dario said -- increasing profits and cash flow by a corresponding amount of $100,000. Applying a business value multiple of 10 times profit achieves a $1 million increase in net business value, he explained.


Dario said that the average RIA’s overhead as a percentage of revenue has remained steady over the years at around 40%, even when firms are growing. Indeed, few advisory firms have achieved big economies of scale, he said -- but the benefits are significant for those who do.

Integrating technology into a firm’s workflow leads to lower overhead expenses and creates more value for the business through operational efficiencies -- boosting growth, cash flow and profitability, he said.

Dario proceeded to make a case for advisors to leverage technology and tackle inefficiencies by integrating technology and practice management. Firms that have done this enjoy a nearly 20% advantage in lower overhead expenses as a share of revenue, he said, citing data from FA Insight.

These “standout” firms also have a compound annual growth rate for new clients of 15%, compared with a 5% industry average, and annual revenue growth that's 47% higher than the industry average, Dario added.


Dario said advisory firms can reach this elite level by rethinking their approach to five key areas:

  • Targeting younger investors: Despite predictions to the contrary, the new direct-channel online advice players are “not going to dis-intermediate yet another industry,” Dario said. Advice built on trust will prevail, he predicted, but also warned that advisors need to learn some lessons from this new competition. Advisors must understand that younger investors expect a firm to have an online presence, Dario said, citing new online platform from Edelman Financial as a good model. Also understand that younger clients will “seek you out on the Internet” and obtain information about the firm through search engines before contacting advisors, Dario added.
  • Using new tools: Dario cited inStream as an example of an “innovate new platform” advisors should be looking at. The product integrates alerts into a clients’ financial plan, letting advisors know, for instance, when a client has experienced a life event like a job change, triggering the need to roll over a 401(k) plan. Another alert might be for a change in interest rates, indicating a lower mortgage rate is available.
  • Document management: Compliance costs are going up, and advisors should expect to face costly examinations more frequently, Dario said. Citing a Financial Planning survey, Dario said about 70% of financial advisors are not using a documentation management system, which can save firms 9% of revenues. Advisors need to look at the new “enterprise content management” (or ECM) systems now available, Dario said. These systems automatically archive, index and store all paper and electronic documents, which can then be quickly and easily searched, retrieved and produced in the electronic format now required by SEC Rule 17a-3.
  • Focus on personnel: Invest in your most valuable asset, Dario urged advisors. Firms that maximize their human capital “attract the best talent, retain the best people, provide the best service and get the biggest returns,” Dario said. Provide workers with the latest hardware, software and mobile devices to make them more productive and “as happy as possible,” Dario said.
  • Upgrading back-office operations: This is where “the most opportunity for efficiencies” is found, according to Dario. Leading firms are creating “composite applications” for rebalancing, portfolio management and CRM to integrate a number of systems to solve a business process, he said. For example, advisors can integrate a custodian’s brokerage system with CRM, a forms filing package, document management system and online signature capability. Composite applications can also cover quarterly performance and billing reports, which usually take weeks to produce, collate and mail, Dario said. Firms that integrated custodians' data feeds with portfolio accounting and performance reporting systems and post the reports on a client portal were able to “dramatically reduce” the time involved, he said. Citing (Financial Planning columnist) Joel Bruckenstein and David Drucker’s book Technology Tools for a High Margin Practice, Dario said firms that leveraged CRM and client portals were able to save more than $30,000 a year, while firms who outsourced portfolio management systems saved nearly $100,000 annually.

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