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Practice Management

Are you ready to integrate powerful technology sooner rather than later?

This Practice Management article is intended for financial advisors only (registered representatives of broker dealers or associated persons of Registered Investment Advisors).

Financial planners are really in the information management business. Each component of our work depends on a mass of information. It's collected, stored, analyzed, manipulated and formatted into files, reports, charts and graphs, and distributed to clients mechanically or electronically.

Our firm uses as many technological tools as possible to make information collection, management and distribution more efficient. Moreover, we work hard to look ahead and integrate the most appropriate software and hardware—the game changers—as they're introduced to the market.

Staying Competitive 
One of the founders of modern economic thought, Adam Smith, pointed to the division of labor and specialization of skills as one key to increased, efficient output and profits. We continue to develop our operations around that irrefutable fact.

The problem is everyone else who wants to grow and prosper is doing the same thing. As a result, whatever financial planners do for their clients-including sitting with them face-to-face, listening to them and providing wise counsel-is becoming more commoditized.

Those who don't update their business processes and delivery systems regularly will eventually suffer one of two outcomes: margin compression or fewer clients. That's because the adapters offer the same services for less, or more services for the same price.

We all know there are ways to combat these trends. Some say, "It's all about the relationship," and if you really connect with your clients on various emotional levels, the investment returns and other financial benchmarks don't much matter to them. Yet I'd say 100% of our clients continually cite "investment return" and "trust" when asked what is most important in their relationship with their financial advisors.

Smart planners realize you cannot always show your clients big gains. You can always give them superior service, but you need to be prepared to explain why they won't always have superior returns, and why the returns they are getting at the moment are as good as possible.

Several years ago, our business consortium, the Zero Alpha Group, set out to look at portfolio management software. Our firms collectively manage more than $7 billion, executing more than 50,000 trades annually. As I wrote nearly three years ago, we eventually settled on iRebal, now owned by TDAmeritrade, and all eight domestic firms in our group moved to that system.

The Plusses
We've found many distinct and substantial benefits. Among them:

Revamped trading operations. We focused on centralizing the management and trading of client portfolios, now totaling about 1,000 accounts. This led to a staffing reduction equivalent to 1.5 employees.

Of course, there's an annual cost for the software license, which varies by assets under management. The net impact was a reduction of one employee, for a net savings of more than $70,000 a year. That amount will grow as our client base increases.

Reduced trading errors. Mistakes can be costly, both financially (making a client whole) and psychologically (enduring the embarrassment of having to contact the client and tell him or her what happened). In the three years prior to implementation, we averaged five errors on approximately 3,000 trades annually, costing us an average of $3,700 a year. Since implementation, we've had one trading error, costing us less than $1,000, on more than 8,000 trades a year.

New focus on management discipline. We are running rebalancing analysis every two weeks on all positions in every portfolio. This means reviewing nearly 150,000 positions. Being able to review every portfolio regularly, rapidly and thoroughly adds considerable value to the client relationship. In today's volatile markets, being able to allocate assets prudently and knowing you can make wholesale shifts in portfolios immediately, if necessary, is comforting to both advisors and clients. Predictable behavior makes it easier to explain to a client what you did and why you did it.

Easy scalability. Adding one or 100 additional portfolios means only a few more seconds in the system's calculations for review, rebalancing or trading. We estimate we could increase accounts by 50% before having to add an additional employee to our staff.

The Minuses 
Using a commercial program comes with a price, of course, and there are limits to what iRebal can do. Here are some shortcomings:

Limited reporting functions. Data can't be exported to another report writer program (hopefully that will change). If newscasts and TV shows are any indication, along with the explosion of smartphones and tablets, our clients will come to expect the same level of visuals from us as they get from other commercial vendors. In the near future, without the ability to translate raw data into attractive graphics, iRebal could forfeit its competitive advantage. In the same way, the early financial planning programs that spewed out column after column and page after page of data lost ground to programs using color graphics.

Limited flexibility. More important, iRebal works as a decision-maker, developing trades for rebalancing, as its name suggests. To do so, it uses a logic hierarchy to make decisions and rank them in order. For example, do we rebalance fixed versus equity first, or rebalance to a specific cash position? This hierarchy can't be changed, which plays a big role in how portfolios must be designed and managed in the system. This limitation is not a showstopper for us because we are discretionary managers with a variety of predefined portfolios. For planners who manage individually designed, nondiscretionary portfolios for each client, however, iRebal's inflexibility may be more problematic.

Limited integration. Advisors and their clients are beginning to enjoy an unprecedented level of sophistication in the analysis, management and communication of their financial affairs, all of which are becoming more streamlined, efficient and timely. In short, the goals of clarity, simplicity, ease of management and confidence in the outcome are becoming a reality for advisors and clients alike. To reach these goals, technology must become more interlinked. Different programs must share information, reducing effort for data entry, lessening errors and increasing response times. Frustratingly, iRebal doesn't do this, potentially diminishing its usefulness as more integrated wealth management systems supporting advisors are developed.

The most technically advanced advisory firms are working to integrate programs like iRebal with their client relationship management systems. Several vendors are trying to create an enhanced system that would integrate all programs. Firms have different organizational structures and workflows, though, so one size won't fit all.

Still, a few firms are using integrated systems, and the impact is startling. Combining individual game-changing programs into an integrated system gives advisors a signficant competitve advantage, allowing them to quickly, efficiently and effectively deliver advice and service to their clients.

My Bottom Line 
For advisors who manage substantial assets, iRebal is one of the game-changing systems that provide tangible savings, scalability and a higher level of client service. Its price-the licensing fee ranges from $20,000 to $50,000 a year for advisors with $300 million to $1 billion in assets under management, plus a onetime setup fee of $10,000-means your business needs to have a certain level of volume and accounts to make it worthwhile.

Even so, the question isn't whether a program like iRebal will help your practice. The bigger issue is whether you should make an investment in game-changing products before you really think you need them to grow your business faster, or wait, possibly too long, and be a follower rather than a leader.


Glenn G. Kautt, CFP, EA, AIFA, is chairman of the Monitor Group in McLean, Virginia.




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