Fintech Corner (6/23/21)

Scaling Your Firm Requires The Right Technology


Most advisory firms want to scale, but not all of them can.

One of the biggest obstacles to scaling is not having the right technology in place, said Adrian Johnstone, Chief Commercial Officer at Practifi, a business management platform for financial services firms.

That’s because to scale effectively, firm leaders and advisors need to have insight into where they are operating most and least effectively.

“For a lot of advisors and wealth managers, the biggest pain point in scaling their business lies in understanding which of their clients are the most profitable,” said Johnstone. “This is an industry that for a long time has believed that the higher the client’s assets and the more AUM they’re adding, the more profitable it’ll be for their business. They don’t realize that high-asset clients can potentially be more expensive to serve.”

While most advisors adhere to regulations requiring that they keep and update data on their client, many fail to connect that data to other information about their business and their workflows, said Johnstone.

Firms need to be able to register their profitability per client, which means they have to be able to access information about how much it costs to serve each specific client.

“A lot of the cost is embedded in the client experience,” said Johnstone. “The technology you need, the team members required to provide that experience — all of those things add up on the cost side. So sometimes, the clients that you feel are top-tier based on their net worth aren’t the most profitable clients – meaning that they’re not necessarily the clients you should be emphasizing. You could well be growing your business in an unprofitable way.”

Advisors have for years been able to easily access information about the revenue side of their business, as custodians historically provide information about income from asset-based fees to RIAs, said Johnstone, but calculating profitability on a client-by-client basis is difficult unless an advisor is using technology that can track every client relationship, every interaction and every task, including all the hours spent preparing for meetings and creating and executing a financial plan.

“If you aren’t factoring the costs of all the technology, time and people involved in client service, then you’ll have a large blind spot in your expenses,” said Johnstone. “Your service team may be spending a huge portion of their time serving a small number of clients – in that case, those clients would be less profitable than they would be otherwise.”

Practifi can track every interaction and task through its system and create a cost-per-client for advisory firms, said Johnstone, enabling firm leadership and practitioners to gain insight into where they should be focusing for growth when developing marketing programs or considering partners for mergers and acquisitions.

The costs behind client service can be especially steep if a firm hasn’t automated its processes, said Johnstone.

“Think about the role that technology can play in managing cost-per-client,” said Johnstone. “If you are moving a folder around from office to office or manually updating and transferring client data across disconnected systems, you may have people spending hours a week that are never actually recorded for these clients.”

Johnstone said that when Practifi users find they are serving some of their clients in an unprofitable manner, the most common response is to adopt new workflows and methods of serving clients that are more efficient and less costly.

For example, unprofitable or low-profitability clients may be good candidates for more virtual meetings and digitally driven services, said Johnstone. Even implementing something as simple and seemingly ubiquitous as e-signatures may move clients from unprofitable to profitability because of the hours saved.

“If you aren’t clear where your time is going, it is difficult to understand when or where you need to scale your capacity,” said Johnstone. “This type of data can help you decide where you make that next hire—the ability to interrogate your data to get a fact-based report that gives you that information allows you to make a more informed decision.”

Technology also increases productivity, reducing the number of human elements needed to process the same body of work, said Johnstone, taking the menial and technical work out of human hands so that advisors can focus on relationships.

While automation and efficiency also help firms put off the expense of a new hire, Practifi’s analytics can show firms where their new hire should go.

“You can only make data-driven decisions with certainty based on the quality of information you have,” said Johnstone. “In poor data management processes, your record-keeping is siloed, locked up on spreadsheets, or exists on different, incongruent systems. Sometimes there’s a data cleanliness challenge with sloppy practices around capturing and maintaining data – all of that goes into impacting decisions.”

Data cleanliness is ensuring that the data entered is complete and consistent. Conflicting and incomplete data creates several risks for firms, including regulatory scrutiny, cybersecurity breach and a loss of efficiency.

For example, a firm could have one client under multiple entries, said Johnstone—one for Adrian Johnstone, another for A.P. Johnstone, another for A. Johnstone, and so on. Such duplication can result in firms never really creating a consistent view of their client over time.

“Data security is also important,” said Johnstone. “The more you capture and understand each client, the more you need to be aware of the privacy considerations and the potential for cyber risks that come with that. So the more data you capture, the more you can do, but also the more careful you need to be when protecting it.”

Firms need to protect data with encryption, especially when it is in transit, said Johnstone, and should also manage access and download controls to make sure information is only accessed by those who need it and that it is not randomly downloaded to unsecured devices.

“The way you scale a practice is to find the most profitable, cost-effective way of growing as possible,” said Johnstone. “The way to determine the most profitable method of growing is to keep data on each client, so you know which ones are bringing you the most profitable play within your business. Capture data well, keep it clean, keep it consistent and ideally keep it in real-time. When you have good data at hand, you have the power to make more important decisions effectively.”