Technology viewed as key to productivity

(August 30, 2004) Advisors who neglect their back-office technology are leaving themselves at the mercy of the marketplace, as rivals become increasingly efficient and meet client’s needs, according to one of Canada’s prominent business minds.

“If you are really successful in any enterprise, you need to root out where the key points of tension are,” said Paul Bates, recently appointed as Dean of the DeGroote School of Business at McMaster University. Bates spoke last week at the Strategy Institute’s wealth management summit in Toronto.

He points out the tension between productivity and client experience, what he calls the “new P/E ratio.” Generally speaking, productivity is reduced by client contact, yet it is this contact which enhances the client’s experience with the advisor, making them less likely to jump ship in rough weather.

Bates says the advisor of the future may be forced to reduce face-to-face meetings with clients, unless they are able to improve their productivity through technological enhancements.

“One of the opportunities for us is to think about is how our back-offices run,” says Bates. “It can take us a long way in building up our practice of excellence that we want to get at.”

One area where technology can dramatically increase productivity is the compliance department, as new software can crunch the numbers in a client’s portfolio and alert the advisor to asset misallocation. Bates says it is not uncommon for a practice to be losing up to 1.5% of its gross revenues due to errors, making a strong compliance department a potential revenue centre.

“The compliance department is there to solve issues when they come along and to prevent problems from ever happening in the first place,” he says.

“In the Boston-Cambridge area, where there’s a large pool of potential clientele, you have very successful family practice offices doing the entire spectrum of business for an all-in fee of 75 to 110 basis points,” Bates said. “The rich are going to figure out that one of the ways of getting richer is not focusing on the high end of the return, but focusing on the low end, which is keeping the money they make.”

“We may have made too much money relative to the work that we did,” said Bates. “I think we’ve got to have an economic model that makes money at a gross revenue range of 90 to 95 basis points.”

As margins are squeezed, it may become increasingly difficult for an advisor to earn a living without rapidly expanding their book. The cost of maintaining low-end clients makes the high-net worth individual even more important to the practice.

In the end, Bates says regulatory costs are not the real enemy of the small advisory business.

“I understand completely what it is like to hang on every phone call that I make or receive,” said Bates, who is also a part-time commissioner at the Ontario Securities Commission. “At every single meeting that I am at with the commission, I end every discussion point with ‘what does this mean in real terms for the people who are providing the service.’ I’ve got news for you, it isn’t going to be the regulator that puts you out of business; it will be the market.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com