Like most financial advisors just starting out, Madelyn O'Connell seldom refused new business. Within four years, however, she had become a victim of her own success.
"We were kind of up against the wall in terms of growth," says O'Connell, founder of Catalyst Financial Planning and Investment Management in Oakland, Calif. The problem was not a lack of clients or the wrong type of client. Located close to Silicon Valley, the company had quickly racked up $125 million in assets serving an enviably young and prosperous clientele.
Yet as her accounts multiplied, O'Connell found herself divided. She wanted to scale her business fast, but she could not prospect for new clients without compromising her level of service. "We were losing that finer level of detail that we used to be able to apply," she says. "When I looked at what was keeping me from marketing or spending time with clients, I realized it was performance measurement and reporting," she says.
So last May, O'Connell turned to a solution that more and more advisors have tentatively begun to embrace: outsourcing. In the past year, a new industry has sprung up to deliver back-office support to time-crunched financial advisors. The basic rationale for outsourcing is that it frees advisors from repetitive tasks and allows them to focus on core functions like marketing and client contact, thereby boosting productivity and profit. In a world of increased competition and declining fee arrangements, outsourcing may be the key to remaining competitive. Yet the array of services now available, from simple data reconciliation to complete turnkey solutions, can seem staggering. Deciding what and when to outsource has suddenly become a top management priority for advisors.
At their most basic, virtual back offices simply download and reconcile account data. O'Connell chose Asset Management Solutions in Vista, Calif., for the company's targeted, secure and unobtrusive service. "They come in via the Internet at night to our dedicated server, take the downloads from our custodians, clean it up and deliver it to us so that it's available when we walk in the next morning," she says.
Outsourcing enables O'Connell to grow her business at a steadier pace than the leap- and plateau-marked path common to small businesses. "We tend to stretch ourselves too thin and then suddenly, after spending $40,000 to $60,000 on a new employee, find ourselves with excess capacity and shrinking margins," she says. By paying a fixed price per account, no matter how large, O'Connell is able to unitize her back-office cost and integrate it into her pricing structure. She figures that in the near time alone, she will save the expense of a half-time employee. Yet the savings are even greater, she says, considering that she would have had to rent additional office space and buy new equipment simply to accommodate another body at the office. Also, she points out, outsourcing puts the burden of hiring and retaining technical employees on her service provider, who can attract and retain staff more readily and pay them less than she would have to in the tight Oakland labor market. "Even the data-entry clerks here want stock options," she jokes.
O'Connell admits that her provider's services are limited. Other virtual back offices print and bind reports and mail them directly to clients or publish them in PDF format on the Web. But her clients, some of them with a hand in inventing underlying Web technologies, don't want paper reports anyway. Like many advisors, O'Connell is moving to provide Web-based access to reports through her Web site. Ultimately, she prefers to pay less for outsourced services and dispense with bells and whistles.
For advisors who prefer more services, a new wave of full-service shops promises to streamline the entire financial-planning process, from client proposals to performance reporting. Financeware.com in Richmond, Va., began as a virtual office, of sorts, where advisors could meet their clients online. Today, the company's platform has expanded to encompass an entire suite of Web-based tools, including one that publishes from any software application directly to the Web for client viewing. As former managing director of strategic planning for First Union Securities, founder Dave Loeper says his role -- foreseeing ways for advisors to remain more competitive in the future -- has not changed. "The point is to make it just as convenient for clients to do business with their financial advisors as with any other online provider," says Loeper.
As competition increases among service providers, the trend seems to be toward providing an ever-greater array of front- and back-office services. For example, PorfolioCorner, a new company based in San Francisco, eventually plans to offer everything from online marketing and referrals to Web hosting to risk- management tools and accounting and trading systems. The company is particularly proud of the risk-management software it plans to introduce this fall. By providing its advisory clients with institutional-grade software, the company promises mid- and small-sized firms instant credibility and scale to compete with larger competitors, says George Tan, president and CEO.
Both Financeware.com and PortfolioCorner use the ASP or service-bureau pricing model, charging clients based on the level of service they choose and the number of accounts they have. This approach works well for advisors who want to streamline one part of their business but have the option to expand services as their firms grow. These providers have an incentive to see the number of accounts that their clients have grow, and they may offer front-end marketing assistance, such as online-referral and advisor-match services.