One day a sophisticated high-net-worth client walks into his advisor's office and says, "Word on the street is that I should have some 'hedge.' How much 'hedge' should I have?"
For most wealth managers, that would be a laughable question.
There is, obviously, no quick answer regarding how much hedging should be used in a client's portfolio. Advisors would first approach the problem by assessing the broad goals of the client's portfolio. A client's risk tolerance would be considered, as would his growth and income needs and life goals. Only then would an advisor get down to the nitty-gritty of creating a hedging strategy.
Now try to imagine the above scenario in terms of technology.
It's a good bet that every day, somewhere in the world, seasoned investment professionals are pulling their technology people into a meeting room and asking questions like, "How much CRM do I need?" or "I need a better reporting solution-how much does it cost?"
These questions are as ridiculous as asking an advisor for some "hedge," and they arise out of the false assumption that technological solutions are sitting on a shelf like any other commodity. As is the case with asset allocation, there are few absolute answers when it comes to implementing a technology plan. Most of the answers depend on a wealth management office's needs, resources and goals. The IT professional will need to ask a client many questions before a solution can be outlined. What do you want the technology to accomplish? What are your security needs? What kind of maintenance costs can you afford? How many custodians do you need to interface with? Do you need a multicurrency solution?
Only after the full checklist of questions is answered can an IT professional start to map out a technological implementation plan and, finally, answer the question, "How much is it going to cost?"
The good news for advisors who want to upgrade their technology is that they are more equipped to manage technology implementation than they may think. That's because many of the principles underlying asset allocation can also be applied to building a comprehensive technology strategy.
Wealth managers and their technology consultants can reach common ground by adopting the Markowitz principles of asset allocation and risk management to build a technology "portfolio." This technique provides a framework for decision-making that will be easy to understand and guide you through the implementation process in the same way you guide your clients through their investment plans.
Following this theme, a technology solution can be systematically developed and implemented by following the same basic steps as an investment manager: