Cultivating Your Practice

Art by Josh Cochran

With much fundamental change occurring in the financial advisory industry, it is fair to say that positioning a firm for strong growth is about much more than simply adding an extra adviser or two. In many cases, a better option might be growth through outsourcing, for instance—particularly for the investment management component of a practice.

The job of scaling up an advisory practice today is undoubtedly made more difficult by the fact that the basic understanding of what advice is and should be is shifting. According to recent research from Cerulli Associates, for example, successful financial advisers today spend less than 20% of their working time thinking about investments and effectuating investment decisions.

“While investing is a key component of any financial plan, advisers spend more time tending to client-related activities, such as acquiring new clients and meeting with current clients,” says Emily Sweet, senior analyst at Cerulli in Boston. “They allocate the remainder of their time to administrative tasks, including office management and compliance-related work.”

More important than the simple fact that advisers spend just a fifth of their time on investment-related work is the fact that those who outsource more of their recurring investing tasks appear to be much better at managing business complexity and building scale in their book of business. Advisers taking this approach may rely more on service partners for investment maintenance and even the basic portfolio construction work that traditionally would have been conducted in-house, but they have much more time to focus on understanding client needs and providing more personalized service dedicated to building long-term, personalized plans and goals.

Experts in a variety of industry positions agree—this is the key to not only building scale but to simply surviving in the new fiduciary future. Repeated—and time-consuming—manual processing-tasks simply cannot be left to an adviser or another human staffer to complete as profit margins continue to be squeezed tighter and tighter.

“Framing their role as relationship-focused could be difficult for many advisers because their value proposition has historically been investment-centric,” Sweet adds. “Our data shows that after tending to important client needs, time available to manage investments is limited. Outsourcing elements of investment management can vastly enhance efficiency.”

Sweet observes there are many outsourced resources available, and, given the regulatory environment, “it is clearly time for advisers to reconsider how investment management fits into their day-to-day job description.”

Accomplishing More With Less
Data published by Schwab Advisor Services in its most recent “Independent Advisor Outlook Study [IAOS]” underscores Sweet’s comments. The findings show there can be little doubt that advisory practices have become leaner since 2006. For example, average assets under advisement (AUA) per independent firm started the decade at $251 million, growing to $339 million this year. Yet, staff size is down significantly, dropping from an average of 27 employees per firm to 17 this year alone.

The numbers offer a stark reminder that simply adding staff does not mean growth will occur—or that dropping staff will reduce effectiveness.

“Over the past decade, the advisers in the ‘IAO Study’ have built lean businesses that have achieved growth and scale against a backdrop of volatility, market highs and lows, and forces of change ranging from the regulatory environment to technology,” observes Bernie Clark, an executive vice president and head of Schwab Advisor Services in Phoenix, Arizona. “They have done this with a constant focus on their clients, while embracing change and seizing opportunities.”

Given the reduction in staff size, it is reasonable to assume that the increased adoption of a variety of scale-building technologies in both the investment and client relationship management (CRM) portions of the business have paid off significantly for many firms. Further, according to Schwab’s research, advisers are “no longer spending the majority of their time working in their physical offices, and, as they look ahead, this trend becomes more pronounced. Where once the advisers’ time was focused mainly on portfolio management and asset allocation, this is now changing.”

Interestingly, it appears that some industry practices are not going away, despite other areas of major reformation. For example, most new clients are still acquired through referrals, as was the case in the last decade, and Charles Schwab says there is no indication in the data that this will change. Thus, any firms looking to actually add sales-focused advisers will do well to consider, as a powerful criterion, a prospect’s ability to network and drive referrals.

It also appears from the Schwab analysis that advisers have come to grips with a future that is to be dominated by the fiduciary standard and restrictions set up by the Employee Retirement Income Security Act (ERISA)—at least when it comes to servicing defined contribution (DC) or individual retirement account (IRA) clients.

It does not appear, however, that advisers believe building a stronger fiduciary relationship with greater numbers of clients will necessarily require more face-to-face time. Many will take advantage of video conferencing and social media platforms to connect in new ways. In fact, according to the research, advisers believe technology will have a profound effect on the way independent firms do business over the next 10 years—as more than three-quarters (78%) believe technology-based process changes will be “noticeable compared with how their firms operate today.”

Both the Cerulli Associates and Schwab research urge advisers who feel reluctant to divorce themselves from the day-to-day management of client dollars to consider the positive scale-building opportunities such a move presents.

“Fewer investment decisions frees up advisers’ time, allowing them to focus more on the broad scope of their client relationships,” Sweet concludes. “Cerulli suggests that advisers view models and other outsourced resources not as a conflict to their value proposition, but as a complement to their investment process. Creating a standard starting point for investing client portfolios can help advisers scale their efforts while allowing room to tailor the end portfolio to suit individual clients’ needs.”

Digital Processing Will Be Fundamental
Adding some practical suggestions to the findings from Schwab and Cerulli, Tom Embrogno, chief information security officer (CISO) for Docupace Technologies, a technology solutions provider for the financial services space, in Los Angeles, suggests there is “no doubt that straight-through processing is a very exciting prospect for the financial services industry, given everything that is being discussed and debated in the marketplace.”

For those unfamiliar with the vernacular, Embrogno explains that straight-through processing simply refers to the capability of a firm to enact the entire client onboarding and service process completely electronically, without the need for re-keying or manual intervention by human staff once a decision has been made. Looking forward, Embrogno says, such capabilities will be absolutely fundamental for firms that want to maintain strong growth prospects under the new fiduciary standard.

“First and foremost, straight-through processing is about connecting better and smarter with each client from the very beginning of the relationship—getting their digital profile set up within the firm’s systems immediately, not a week or a month after the relationship starts,” he says. “If you take a high-level look at what the Department of Labor [DOL] is doing to the industry today, it’s really all about transparency and improving the ability to connect with and service your client as best as you possibly can.”

Embrogno says the push for more connectivity and transparency does not just apply to individual clients—it is also about bringing disparate systems together to create a truly holistic approach to advice. Information must flow among all providers touching a client, and it must be brought together in an elegant way to provide the new level of reporting and transparency the DOL will require.

“The real point of all this thinking is to get advisers, broker/dealers [B/Ds] and other providers to a point of perfect, real-time processing,” Embrogno continues. “To make a rapid increase in scale possible, processing must be as efficient as possible, and get you to the lowest cost of operation possible. Perfect processing means you can electronically process any type of important information coming from a client, in real time—whether that’s a request to open a new account, or it’s a commission payment or it’s a simple communication with a client. It also means an unprecedented documentation capability.”

Embrogno expects that many firms over the next several years will move to implement what he refers to as “perfect processing,” wherein they will look to onboard new clients with a baseline of data already collected, to be keyed into the adviser’s systems immediately upon hire—potentially even drawing the data automatically from payroll or recordkeeping systems. Under this approach, he says, a firm would immediately and automatically be able to tell if a given client was going to need a best interest contract (BIC) exemption to be papered, for example, or what specific model or suite of products would likely fit the client best—and, perhaps most important, why that is the case.

“Image that, as you are bringing clients on board, you can also have mechanisms and technology validations in place that are able to parse out exactly what fees and expenses will be assessed in that account—and this can be automatically converted into a report to be shared with the investor,” Embrogno says. “Not only is this great from the fiduciary protection standpoint, but it’s going to be very easy for the adviser to be more consultative and to be able to very quickly pull the key information on a client.”

Like Sweet and Clark, Embrogno feels this type of evolution will naturally free up advisers to focus more on what they do best: “actually engaging with clients, discussing the long-term plan and building a coherent set of financial goals.”

KEY TAKEAWAYS

• As advisers spend only 20% of their time on investments, outsourcing this function so that they can concentrate on the client relationship many times is sense worthy of consideration.
• Data shows that technology has enabled advisory practices to become more efficient, so the need to expand staff as assets grow may not be not as urgent as it was a decade ago.
• Technologies on which advisers should rely on include investment management, customer relationship management, straight-through processing and videoconferencing.