The large custodial firms are ramping up their technology assistance for advisors.
Judging from the feedback I receive, advisors are
more interested in technological issues than they were a few years ago.
Many advisors I hear from willingly admit that they are not operating
in an optimal technological environment, and many fully believe that
prudent spending on their technological infrastructure will yield a
good return on their investment. What many of these firms lack,
however, is a trusted source of technological advice.
While a number of independent consultants (including one associated with the author) offer independent technology advice, the major custodians to independent advisors all have identified technology as an area where they can provide a valuable service to clients, and in some cases to prospective clients. I recently spoke with representatives of four major custodians (Schwab, TD Ameritrade, Pershing and Fidelity) to see what type of technological assistance they provide on either a systematic or ad hoc basis.
According to Dan Skiles, vice president of technology at Schwab Institutional, his firm has ten regionally based technology consultants who work closely with the various Schwab institutional sales offices. "These technology consultants are capable of assisting in all aspects of technology," says Skiles. This means that in addition to helping advisors make better use of tools offered directly by Schwab through their Web site and through other channels, Schwab technology consultants will also assist firms with back-office issues and third-party software.
Skiles says that his firm offers both comprehensive consultations and shorter targeted consultations. A comprehensive "soup to nuts" evaluation would cover everything from an evaluation of a firm's CRM software to its back-office processes. Such a comprehensive engagement can take up to several days on site, with additional time devoted to reporting, implementation and follow-up. Skiles says that the primary goal of each consultation is to shorten the technological learning curve for advisors.
A comprehensive evaluation results in a consulting report. The report outlines areas within the firm that are operating efficiently, and those that could be improved. According to Skiles, all recommendations are accompanied by a detailed action plan. In addition, the report contains estimated results that implementation might produce. So, if a piece of software that costs $5,000 is estimated to save 100 hours of labor annually, and the cost of that labor (salary, benefits, equipment, etc.) is $7,500 annually, the advisor has the information necessary to make an intelligent decision.
Shorter engagements generally are arranged to target one or more specific issues. This might be something like automating a single task or identifying a new CRM package that meets a firm's needs. In 2006, Schwab completed an estimated 750 engagements, consisting of roughly 100 comprehensive engagements and 650 shorter engagements.
TD Ameritrade currently has nine regionally based technology consultants, says Brian Stimpfl, managing director of business solutions at TD Ameritrade Institutional. According to Stimpfl, the Solutions Consulting Group was a natural evolution of TD's service offering. "A few years ago, advisors started calling and asking for more help with Veo, TD's online platform for advisors, as well as other tools of ours, so we created a group to go and provide live help to our best advisors. Over time, as advisors asked for advice on a broader range of issues, our group has evolved to offer consulting advice that extends beyond what TD Ameritrade has built."
Like Schwab, TD offers both comprehensive and shorter, targeted engagements, and the similarities don't end there. When conducting comprehensive engagements, TD consultants can spend multiple days on site, monitoring workflows and interviewing staff. The findings are presented in a comprehensive written report. The report offers specific recommendations, a detailed action plan, costs and estimated returns on investment. TD will also assist with implementation. Then, they will follow up, monitoring the firm's progress over time.
Shorter engagements usually target specific needs. Stimpfl estimates that the group will conduct approximately 50 comprehensive engagements in 2007, and roughly 550 shorter ones. According to Stimpfl, the primary goal of these engagements is to help advisors grow. "This helps the advisor, it helps our business and most importantly it helps the public by expanding our advisors' capacity to serve them."
"Pershing's extensive technological offering is enough to meet the needs of many advisors," says John Iachello, chief operating officer of Pershing Advisor Solutions LLC. On the other hand, many advisors require additional technological tools, and Pershing wants to help.
A Pershing relationship consultant visits each RIA client at least once a quarter. The focus of the visits is on improving the business of the RIA. When a consultant identifies a technological need, the consultant can access the appropriate resources at Pershing to offer a solution.
Since Pershing primarily targets larger advisory firms, it is unusual for these firms to have 100% of their assets with Pershing. According to Iachello, the typical client has at least $200 million with Pershing, representing about one-third of the firm's total assets under management.
Larger firms with multiple custodial relationships "are a completely different world" from smaller RIA firms doing all their business with a single custodian, he says. A larger firm might have at least three layers of software. For example, there's a front-end platform for generating trades; then there is the custodial platform. In addition, there is the back end, which aggregates everything on the client firm's side.
In order to operate efficiently, all of these software products must communicate with each other. Trent Witthoeft, vice president of Pershing Advisor Solutions LLC, says his firm can help in at least two ways. First, Pershing will help recommend specific products. "We are familiar with many of the products an advisor is likely to consider in a product category," says Witthoeft. Since Pershing is familiar with the RIAs' needs, the company can usually help them to find a good match. In addition, says Witthoeft: "We will go out and help install the software. We will help manage the software, too." Second, because of its background working as a broker to brokers, Pershing is used to building software bridges between software products. For some clients, Pershing will help create interfaces so that an advisor's software (or the software the advisor buys from a third party) can communicate with Pershing's software.
Fidelity has a team of technology specialists that regularly visits RIA offices and offers end-to-end technology assessments. These specialists audit operations and provide reports on how firms can improve their operations.
"What we are finding over the last year is that financial advisors are facing challenges about how they grow and manage their businesses efficiently," says Gary Gallagher, senior vice president at Fidelity Registered Investor Advisor Group. "Now the growth is there, but as studies by Moss Adams and others reveal, the costs often are outpacing growth because advisors are being asked to do a lot more and take on more complex matters. It's putting a lot of pressure on margins."
One major challenge that Fidelity Tech specialists find is common to many firms arises from adding new applications and maintaining the new software with existing programs so that they can still interface with other parts of the office. Gallagher says that Fidelity itself is devising new programs that eliminate duplicative tasks like having to re-key data while also minimizing errors.
Later this year, the custodian will roll out a customized, integrated CRM platform and financial planning platform for RIAs. The CRM system, a customized version of Oracle's Siebel CRM on Demand, and the financial planning application, EISI's Naviplan Central, are Web-based applications that will be integrated into Fidleity's Advisor CHANNEL platform for advisors.
While free technology consulting sounds great, all of the custodians acknowledged that they cannot provide this service to every one of their RIA clients. They do, however, try to leverage the knowledge they gain in these engagements in such a way that it benefits many more of their clients. For example, all of the custodians offer regional seminars where their advisors can network and share ideas. All of the custodians host a national conference where technology sessions are held. In addition, TD Ameritrade and Schwab have participated in the annual Technology Tools for Today Conference. At all of these venues, technology consultants from the respective firms disseminate selected findings from the consulting engagements they've undertaken. Let's look at some of the things they've uncovered.
According to Stimpfl, TD Ameritrade has identified five key processes that are universal across all the firms they've visited. The average firm, he says, spends 300 hours per year on opening new accounts, 350 hours per year on trading, 360 hours per year on generating performance reports, 390 hours per year on managing workflows throughout the office and 450 hours per year doing data reconciliation between custodial downloads and portfolio management software. Bear in mind that these are just averages, and in some cases they understate the problem. For example, in the area of reconciliation, some firms outsource all or part of the process, so they might only spend 50 hours or less per year on reconciliation. That means that the remaining firms are spending much more than 450 hours per year on this task. Since these processes take up so much time, it should be obvious that any productivity gains here will yield significant savings, and the recommendations that TD Ameritrade has made in recent engagements bears this out.
In 65% of engagements, TD Ameritrade consultants have made recommendations to streamline a firm's account-opening process. In 65% of engagements, they have recommended changes in the workflow process and/or the client relationship management (CRM) system. Fully 61% of the engagements resulted in recommendations to implement or improve paperless office systems. When it came to streamlining trading processes, consultants identified significant opportunities for improvement in 57% of the cases. Finally, in 100% of the engagements, consultants identified at least one significant outsourcing opportunity. "The specific outsourcing recommendation varied greatly by firm," says Stimpfl, "because each firm is different, but outsourcing is reasonably priced and it is too much of an opportunity to ignore."
Skiles notes that Schwab's findings vary somewhat based on firm size. Generally speaking, smaller firms, which Skiles defines as those with less than ten employees, appear to be somewhat overwhelmed by technology. That is, the principals of the firm have so much going on that they tend not to think about technology in a strategic way. With firms of this size, Schwab technology personnel will try to identify about half a dozen technology changes that can have a substantial impact on the firm. Skiles believes that smaller firms will not want to tackle all the half dozen suggestions at one time, nor should they. "Initially, we'd like to see the firm pick one or two of our recommendations to implement." Depending on the nature of the recommendation, implementation could take weeks, or it could take months. Presumably, if the initial recommendations are implemented successfully, and they yield the expected results, the firm then will be encouraged to make further technological upgrades.
In the case of larger firms, those with at least ten to 20 employees, Skiles says that part of his team's job is making sure that technology is meeting the needs of all people at the firm. "With larger firms, the needs of people working in various departments might be different." It is not unusual, says Skiles, to see a firm spending heavily on technology in some areas, but not in others.
If a system is designed to be used by everyone at a firm, it is important to get input from all areas of the firm before a solution is implemented. "If you don't get everyone's input, then not everyone will use it. If you have 20 employees, and only 11 have input into the process, odds are only 11 will use it; nine won't. If this turns out to be the case, you will only get about half the return you expected on your investment."
Skiles also emphasized the importance of training. In order to get the maximum return on investment, sufficient training is a must, he says.
Pershing's Witthoeft says his firm's advisors, who fall squarely in the larger-firm camp, have lately had a keen interest in pre-trade execution management, post-trade execution management, tax-efficient rebalancing and performance attribution.
Some issues transcend size, however, and the issues that Schwab has identified are remarkably similar to those mentioned by TD Ameritrade. These include better handling of routine tasks such as trading, billing and reporting, paperless office technologies and work-flow-related issues. Skiles adds that most advisors they visit have some sort of CRM system in place, but it often is either underutilized or insufficient to meet the firm's needs.
The major custodians are clearly making an effort to provide a high level of technological expertise to their best clients and prospects. While not every advisor will qualify for personalized service, most custodians are attempting to systematically store and organize the data they collect during live engagements in a way that can benefit a much larger audience.
Based on the data TD Ameritrade and Schwab shared with me, it appears clear that a large number of RIA firms are operating suboptimally in a number of key areas. These include data reconciliation, work flow, performance reporting, trading and new account openings. If your firm is "typical," there is a good chance that you could have inefficiencies in one or more of these areas too. If you want to uncover opportunities to increase effectiveness within your practice, the findings of the custodians offer you some excellent hints as to where you should start looking.