For those functions retained in-house, scalability can be enhanced through a combination of business process automation and integration. By using technology for tasks like creating investment policy statements, portfolio construction, accessing asset managers and investment products or portfolio stress testing, firms can increase processing capacity without a commensurate increase in headcount or expenses. 

While these tools can help advisors perform internalized functions more efficiently, additional productivity gains are achieved through workflow integration and automation. Intuitively this makes sense as technology can increase the efficiency with which a specific task is completed, but substantial additional benefit is achieved by eliminating the need to complete redundant tasks altogether.

Once technology has been deployed to streamline various business processes, the majority of quantifiable productivity gains in business process automation arise from the breadth and depth of integration.  

To create a growth company in today’s technology-driven marketplace, we believe that advisory firms need to be networked and flexible. They need to choose what to focus on, and find partners to do the rest. Even the largest of firms will rely on only a handful of key strategic partnerships that enable business model flexibility and empower scalability and growth. 

Revenue Expansion

In addition to the relentless pursuit of lower operating costs and improved scalability, advisors also need to expand the services provided to clients—in some cases to protect existing revenue and in others to expand the revenue generated on client assets. 

The primary products of choice for advisors building fee-based businesses have traditionally been mutual funds and separately managed accounts (SMA) portfolios. 

  • Mutual funds offer a wide range of choice, are ubiquitous and are highly-liquid— i.e., easy to use in asset allocation models. Most independent advisors use mutual funds as their primary investment product when building fee-based portfolios for clients according to a Cerulli Advisor Metrics report. 

  • SMA portfolios have traditionally been used in the national and regional broker/dealer channel. They offer greater transparency and security-level control, but were complicated to use in combination with other products in populating an asset allocation model. The development of the model-based management of active investment strategies has enabled SMA portfolios to be used in much the same manner as mutual funds in a diversified client portfolio. 

Most importantly, greater use of SMA portfolios enables advisors to expand the scope of advisory services provided to clients. The two most notable services are (a) environmental, social, and governance (ESG) screens for clients with particular needs and/or preferences, and (b) tax management.

ESG screens are generally referred to as account “restrictions”, which most advisors provide as a means of helping to differentiate their service and personalizing their advice. Advisors don’t generally charge a higher fee on accounts with restrictions, but do view the service as a way of protecting their existing fee structure. 

However, that is not the case with tax management. The paradigm shift to model-based trading enables advisors to exercise greater control over the tax implications of portfolio trading through expanded use of SMA portfolios. Tax management provides an excellent opportunity for advisors to increase revenue on client assets and enhance their value proposition to clients.