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:

Client intake and profiling
Strategic planning
Investment policy statement
Asset allocation
Implementation
Monitoring and maintenance

The client intake process determines the client's identity, goals, risk parameters, time lines and, finally, scale. Just as with asset management, this is also the part of the process that allows the advisor/consultant and client to get to know each other and become more familiar with each other's thinking.

Using the information derived from the "client intake," an IT professional can come up with a strategic plan that maps out the envisioned technological solution. The plan would then take written form, just like an investment policy statement.
In developing a technological solution, "asset allocation" consists of choosing the components that best fit the client's "investment policy statement." This is a balancing act, just as it is in working up the equity and fixed-income ratio of an investment portfolio. This is followed by "implementation," which involves selecting the specific products used to fill each allocation basket after a due diligence process

"Monitoring and maintenance" involves making sure the new technology is doing what it was designed to do and remains up to date. Just as an advisor may have to rebalance a portfolio, IT staff may have to adjust to changing needs and conditions. It's also a step that involves maintaining the client relationship and following up periodically with the market and client to make sure that the "investment policy statement" has not changed and that the overall plan is being followed.

As you delve more deeply into this step-by-step approach, consider the following:

Client Intake: This involves learning the complexion of the client's technology needs on a global level, considering factors such as regulation, compliance, risk tolerance, etc. Just as a portion of a portfolio may be categorized as "low risk," components of a technology plan may each have their own risk levels. You may want a technology "asset class" such as reporting to have very little risk of error, but you may be less concerned with risk in something like a CRM system, where there is little compliance risk and lots of upside for process improvements.

Strategic Planning: This establishes how the firm will use technology and try to formally compose a document similar to an investment policy statement that looks at technology use and implementation for the medium and long term. The way a category is implemented may change, but not always. The notion that security, or network defense, is important to the firm should not change very much over time.

Asset Allocation: Lay out your applications into several different "asset classes" to create an overview of all of the different IT assets that should be a part of your technology "portfolio." The accompanying chart depicts a sample "asset allocation" for a rapidly growing multifamily office that serves ultra-high-net-worth clients.

The graphic illustrates four main asset classes used by the wealth management firm:  the desktop computing environment, communications, knowledge management and financial applications. A fifth class, called "other tech," consists of IT functions that are generally hidden from network users.

The five classes may be thought of in the same way that an asset class category such as large-cap stocks is viewed in an investment portfolio. Within each technology class, there are different components, just as there would be different sectors and different stocks, mutual funds or separate accounts under the heading of "large caps" in an investment portfolio.

The Desktop Computing environment includes the standard office suite, including word processing, spreadsheet, presentation and cross-platform document reader applications. These are applications that are generally designed for single users. Files worked on by individuals originate here before being handed off to other users.  As an example of how categories are linked, the asset class is "desktop," the sector is "cross-platform reader" and the implementation is Acrobat Reader.

Communications consists of tools such as e-mail, calendars, voice mail, telephones, Web access and portable devices such as smart phones. These items all have an individual and personal quality about them while still belonging to some sort of network, either inside or outside of the firm. Under the "communications" asset class, a sector would be "e-mail/calendar" applications and an implementation would be Oracle Collaboration Suite.

Knowledge Management refers to systems that organize intellectual property. They are multi-user and network-centric and need to be accessible to the entire organization. The category includes document management, archiving and client relationship management (CRM) solutions. Compliance issues are a particular consideration in this category and may drive archiving requirements. In this asset class, "CRM" would be a sector and Salesforce.com would be an example of an implementation.

The Financial Applications group is where all of the financial data comes together at varying points in the wealth management process. The number of tools used in this group can vary. A small firm, for example, may not require cash flow planning software, tax planning tools or in-house estate planning tools because it relies on strategic partnerships with estate planning attorneys or accountants to handle these areas for clients. Large firms, by contrast, may need all of those tools to be available in-house. In this category, the technology needs of large national firms may be geographical. A firm's merger and acquisition planners, for example, may be based in Chicago, the trust experts may be in New Jersey and the compliance experts may be based in Washington, D.C.  In these cases, the accessibility of certain software tools would vary accordingly.

The fifth and final asset class, Other Tech, generally does not directly affect users. It is an important area, however, and includes anti-virus, anti-spam, backup, disaster recovery, security and encryption technology. These are all very arcane areas of technology to the layman, but they are vital components of a technology plan and represent the last line of defense against potentially disastrous breaches of security. For example, a physical break-in into a wealth management office may cost $25,000 in equipment and cause some delays getting back to business. But if someone breaks into your network and compromises all of your client data, it could be a firm-ending event.

All technology is imperfect-regardless of the claims made in marketing materials. Managing technology is an exercise in the art of compromise. You will always be balancing between strength versus weakness, risk versus reward and costs versus schedules and the "holy grail" of user friendliness.

Once you are familiar with your technology "asset classes" and you are working on implementation, you can create a list  of requirements in each application sector that you can use to create a "test case" for assessing different products. Contact multiple vendors and carry out due diligence in the same way that you would for a money manager. Make sure their product fits your needs, their references check out and that they are affordable and aligned within your business model. Carefully read the proposed contract. You'd be surprised at how one-sided tech contracts can be in the favor of the vendor over the customer. You will often find that if there's a problem with the product there will be a strict limit of liability. Vendor contracts may also have major indemnification clauses that may pose significant risk to your firm.  

Once you have enough information to select a vendor that has proven it can handle your "test case," I recommend one extra step in the process. Require the vendors to successfully complete a pilot project as a condition of the contract. This allows you to move forward with bringing a system online, but also gives you the luxury of canceling the contract if expectations are not met.

Once the pilot project is completed, you can put your system into full production and move on to the "monitoring and maintenance" phase of implementation.

When replacing a system, you should always have certain performance goals in mind, just as you would for an investment portfolio. Examples of these goals, or "success matrix," include shorter turnaround on reports, more accurate accounting, more efficient client relationship management and improved customer service. I once built a system for a large financial services firm that reduced the report publishing cycle from 14 weeks to eight minutes and saved $2 million per year in express shipping.

By using the methodology of portfolio theory to implement today's technology, wealth managers can draw upon their own experience and knowledge to operate more efficiently.

Bryan Bell is president of Synth-Bank Consulting LLC in Gig Harbor, Wash. He can be contacted at [email protected].