A Data-backed Solution to Building a More Profitable Advisory Business · 2020-01-06 · A...

A Data-backed Solution to Building a More Profitable Advisory BusinessNEW STRATEGIES TO HELP INCREASE THE PROFITABILITY POTENTIAL AND VALUE OF YOUR FIRM.

John D. Anderson, Managing Director and Head of SEI Practice Management Services, SEI Advisor Network

Brad Bueermann, CEO, FP Transitions

Raef Lee, Managing Director and Head of New Services and Strategic Partnerships, SEI Advisor Network

Table of Contents

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Table of contents

Introduction ...............................................................................................2 A guide to this paper ............................................................................3 Reimagine your business....................................................................4›When you’re the asset, allocate wisely.›Ready to rethink?›Talk about time: How do you spend your most valuable asset?

Strategies and opportunities to reclaim your time ................. 7›Delegating noncore activities: Perception vs. reality›Level-setting: How we view outsourcing›Why outsourcing?›Advisor-perceived pros and cons of outsourcing›Can strategic outsourcing help you become the firm you want to be?

Applied mechanics: Boosting productivity and profitability .....................................................................................10›IT infrastructure outsourcing: Look familiar?›Back- and front-office outsourcing›Outsourcing the legal/compliance function›The next outsourcing trend: People›The elephant in the room: Frank conversation about outsourcing the

investment management role

The value of time: The financial implications of two distinct practice models .................................................................................... 26 Five steps you can start now to build a profitable advisory business ................................................................................ 28

Introduction Over the past two years, we have examined various

aspects of our perpetually disrupted and dynamic

industry, resulting in a series of white papers, including

The Next Wave of Financial Planning; Finding Your Inner

Techno-Advisor; Acquisition & Succession; and Fees at

a Crossroads. The punchline, invariably, comes down

to how you will compete effectively in a dramatically

changed advice industry. There’s a theme here, and in a

way, the culmination of our research leads us to our next

investigation: How do the most successful advisors make

the shift from practice to business?

Our research supports our view that the most resilient

advisors—and those most likely to prosper—are laser-

focused on two priorities: nurturing client relationships

and truly transforming the client experience.

From compliance and marketing to investment management

and technology, the landscape is shifting. In this white

paper, we assess the current landscape and explore

strategies to help you reimagine your business—not just

what you do well, but all facets of your business that could

boost profitability and strengthen your client relationships

and your teams.

When you think about your business model and your value

proposition, ask yourself if your firm has what it needs to

build a long-term successful business with enterprise value.

2 | A Data-Backed Solution to Building a More Profitable Advisory Business

A guide to this paper Financial advisor surveyWe have incorporated responses from our online survey conducted in March 2016. We

offer insights from the 506 respondents into their typical business activities to help

advisors/owners better understand the state of the industry and to assess their own agenda.

Industry insightsThroughout our paper, contributing voices enlarge the scope of the conversation to help

you think differently about various aspects of your business, including:

› Keith Mitcham, CFP®, Partner, Strategic Financial Advisors

› Jennifer Goldman, CFP®, President, My Virtual COO

› Craig Moreshead, Esq., Vice President, NCS Regulatory Compliance

Benchmarking research reportSeparately, the research conducted by FP Transitions®, The Value of Time: Quantifying

how client focus increases the value of your business, capitalizes on the firm’s extensive

database of advisory practice valuations to identify the factors that could unlock a firm’s

future enterprise value. It looks at how two distinct business models compare in terms of

current operations and long-term value to help owners assess their firms’ position relative

to peers as a foundation for achieving growth and profitability.

Five steps toward a more profitable advisory business As always, we conclude with practical, actionable steps to help you rethink ways to

enhance your client relationships and thrive in today’s ever-changing investment

advice landscape.

2 | A Data-Backed Solution to Building a More Profitable Advisory Business A Data-Backed Solution to Building a More Profitable Advisory Business | 3

Reimagine your business

When you’re the asset, allocate wisely.

An advisor we talked to recently confessed that he was struggling to grow his business, even though he

was “giving it 100%.” This is a CEO who has run a moderately successful firm for many years. Shifting the

conversation to discuss more broadly all that he does, it was apparent that he wears many hats. Among

other things, this advisor is the:

Chief marketing officer – responsible for brand, content, events, lead generation, etc.

Chief operations officer – responsible for compliance, paperwork, human resources, benefits,

payroll and technology

Chief financial officer – responsible for the company’s accounting systems, policies and procedures,

budgeting, planning, cash flow and financial records

Chief investment officer – responsible for research, asset allocation decisions, investment selection

and monitoring, portfolio rebalancing, performance reporting and communication

Lead planner and client relationship manger – responsible for financial planning, client service

meetings, one-off client requests and ongoing relationship management

The CEO couldn’t possibly be giving 100% to each of these roles because the tasks are too different and

the skill sets too broad. Yes, he was giving 100% to the business, but the individual tasks were being

shortchanged. Think about it; most of these duties are not something you do part-time in a thriving

business. If this scenario sounds familiar—and we’ve witnessed it many times over—it may be time to

rethink your organization and how work gets done.

Ready to rethink? Let’s take one step back before we move forward. Here are some questions to help you get started:

› If you could start with a clean slate, what would you do differently? How would your business look today?

› Do you hope to acquire and grow?

› Are you building your business to sell?

› Do you plan to simply wind down and shift gears to retire yourself?

› Knowing what you know now, would you buy your business today?


Talk about time: How do you spend your most valuable asset? We all have the same 24 hours in a day; it’s just that some of us are more productive than others. It will

come as no surprise that being an advisor today is not a nine-to-five job. A recent survey from the FPA

found that nearly a third of advisors work 50 or more hours per week—those newest to the industry tend

to work even more than that—and the average advisors take just three weeks’ vacation per year.1 More

than two-thirds (88%) work at least one evening (after business hours) a week; 40% work three or more

evenings; and more than half (56%) occasionally or regularly work on weekends. As it relates to increasing

productivity, the top two perceived obstacles advisors face are:

› Trying to do too much (36%)

› Increased administrative burden (31%)

According to our survey conducted in March 2016, participants report that they spend nearly one third

(32%) of their time each week meeting with clients. In person, on the phone or virtually, prospecting activity

consumes a much lower percentage of the average respondent’s week. Imagine how different

the outcome could be if advisors spent four days a week focused on business growth activities rather

than a few hours.

FIGURE 1 Advisors reported spending their average work week on these activities.

Client portfolio management

General o�ce administration

Marketing and events

Training and professional development

Compliance and risk management

Back o�ce

Technology

Trading/transactions

Vendor management

Human resources2 %2 %4 %4 %5 %5 %

5 %

6 %8 %

11 %

32 %

16 % 48 %Meeting/managing

existing clients

Prospecting meetings/activities

ONLY

of advisors' time is spent on client service and prospecting

52 %of time was spent on otheractivities

Source: SEI Survey, Outsourcing, March 2016, n=506


Our research reveals that the top two activities advisors wish they had more time to devote to are precisely

that: business development (60%) and client service meetings (22%).

In fact, when we asked them what one of the biggest concerns is: 67% of our survey respondents

agree or somewhat agree that not having enough time to focus on growing their business is a

significant pain point.

CEG Worldwide, a leading coaching firm for the financial advisory business, suggests that you “zealously

guard your time and use it as effectively as possible. Just because you can do something does not mean

that you should do it. Let your activities be informed by what actually works.”2 Their research shows that

advisors who want to maximize income and grow their business should focus on two areas: client service

and client attraction. This means your primary efforts should be centered on delivering a world-class client

experience and creating a continual flow of qualified prospective clients.

FIGURE 2 What is the one area where you would spend extra time in the business if you could?

Takeaway: No time for trainingTraining can drive results, increase employee engagement, and increase innovation and productivity. Yet

most advisors in our survey (61%) acknowledged that they don’t have enough time for training—either for

themselves or their staff. Many also lack the requisite skills to be effective. Whether it’s onboarding a new

advisor or staff member, learning new skills or helping teams keep abreast of the latest enhancements to

their CRM or compliance trends, a commitment to training is often subordinated to other seemingly more

pressing priorities.


Growing my practice

60%

22%9%

3% 3% 2% 1%Client service/meetings

Streamlining processes

Investment management

Technology Continuing education

Other


Strategies and opportunities to reclaim your timeDelegating noncore activities: Perception vs. realityBusinesses think about hiring a third party to handle various tasks and responsibilities for many reasons,

including a lack of resources or expertise, or just a way to scale their business. Morey Stettner of Investor’s

Business Daily recently observed that “Advisors seem to form strong opinions about outsourcing.” He

says they either “…become fans of farming out activities that make sense, or seek to demonstrate value to

clients by amassing wide-ranging expertise in-house.”3

When asked, “Do you believe in the concept of outsourcing,” only 30% of survey respondents said they

outsource as much as they possibly can.

FIGURE 3 Do you believe in the concept of outsourcing?

Source: SEI Survey, Outsourcing, March 2016, n=506`

No, the firm likes to control all aspects of our business

Sometimes, when we can increase profitability by doing so

Yes, the firm outsources as much as we possibly can

Sometimes, when the function is not core to our business

7 %

29 %

30 %34%

?


Level-setting: How we view outsourcingAs we delved deeper into our survey results, it occurred to us that many participants may not have the

same understanding or definition of outsourcing that we do. Even though advisors rely on select third

parties to handle various aspects of their business, it’s not entirely clear that advisors view the handoff

as outsourcing.

We define outsourcing as a strategy that enables an advisor to delegate noncore activities to a third party

rather than perform them in-house. What do we mean by noncore functions?

Any activity that keeps advisors from meeting with clients and prospects to solve their wealth

management challenges is a noncore function.

Outsourcing is not a cure-all—it is strategic, not tactical. And it doesn’t relieve you of your responsibilities

to conduct business in the best interests of your clients. While outsourcing can be a cost-effective solution,

it’s not a “set-it-and-forget-it” strategy; you need to manage your vendors to get the most out of their

services.

Why outsource?

Most firms, even the smallest firms, use third parties to manage their bookkeeping, payroll and, to some

extent, their computer networks. Outsourcing other tasks and responsibilities enables firms to grow

without adding staff. More importantly, contracting out certain tasks enables advisors to focus on the areas

in which they are proficient and minimize potential liability. But it’s more than that; it’s not just potential cost

savings, although McKinsey estimates the benefits of outsourcing are worth three to ten times the cost; the

greater benefit might just be the value derived from the way your employees will use the extra time that

automation gives back.4

Advisor-perceived pros and cons of outsourcing

From cloud computing to big data, mobility to workflows, technological advancement and innovation

are redefining how work gets done in the advisory business. Today’s advisors outsource a growing

number of office functions for a range of different reasons. Among the most frequently cited reasons

why advisors outsource:

› More time to grow my practice (26%)

› More time to spend with clients (21%)

› Greater efficiencies and consistency of process (20%)

The most frequently mentioned arguments against outsourcing in our survey include:

› It’s too expensive (29%)

› I’ve built an infrastructure that supports my business (22%)

› Investments are our firm’s value proposition (13%)


Can strategic outsourcing help you become the firm you want to be?

Perception Reality

Outsourcing will solve all my

technology challenges.

With the right partner and a flexible contract, your firm

may be able to maintain a leading edge as innovation

and your business evolve.

Outsourcing will always save me money.While net revenue may not change, the added gain in

productivity and time may begin to change the bottom line.

Outsourcing is too expensive.

This myth has persisted for decades; our research and

that of others validates that firms do enjoy bottom-line

benefits with outsourcing. Our industry has become

effectively specialized, and incentives exist for third

parties to deliver a broad and growing range of quality

services, often more cost-effectively than performing

them in-house. If you factor in the real and opportunity

costs of doing everything in-house, you may be

surprised just how attractive outsourcing can be.

If I outsource, my clients won’t want to pay

me for my services; how can I justify my fees?

The real value you deliver to clients is the ability to

coach them through their financial lives. No third party

could ever know your client better than you do—or

guide them better through the wealth management

maze. Talk to your clients; you might be surprised to

learn that they would prefer that you work with third

parties that may be better equipped to handle the

executional side of their accounts.

Third parties could never provide the level of

service I deliver to my clients.

That’s true only if you let it happen; your management

skills come into play here by selecting the right

functions to outsource, choosing the right third party,

and managing the relationship to ensure your complete

satisfaction.


Applied mechanics: Boosting productivity and profitability

For this paper, we consider five different categories of outsourcing services that have proved effective in

terms of freeing up staff and advisors’ time and delivering measurable results. Specifically, these include:

1. IT infrastructure

2. Back- and front-office services

3. Legal/compliance

4. People

5. Investment management


UPGRADE SYSTEM ADDITIONAL SYSTEM ADDITIONAL STAFF+ +

YOUR FIRM

Aggregation

CRM

Analytics/Research

Financial Planning

RebalancingAdvanced Portfolio

Management

+ +Custodian

Document Management

Reporting/ Portfolio

Management

+Sta�

+ Sta�

+Sta�

+Sta�

Advanced Reporting

Our survey respondents are acutely aware that they need better, more streamlined processes and systems

(84%) and that they are not taking advantage of technology effectively (81%).

1. IT infrastructure outsourcing: Look familiar?This illustration speaks volumes. Advisors today are:

› Juggling multiple technology systems

› Managing operations

› Working with several investment providers

› Using more than one custodian

› Struggling to keep up with regulatory requirements


Agree Somewhat Agree

Disagree Not sure

43 %35 %

42 %46 %

15 %18 %

1 %1 %


FIGURE 4 What are the main pains your practice is experiencing?

Admittedly, our industry has been one of the slowest to adopt technology solutions that improve the

daily work lives of advisors and their staffs. When the individual component parts are built or rented from

multiple, disparate organizations, it’s no wonder advisors have so little energy to focus on growth. With so

much time and money invested in researching, buying, replacing and maintaining systems, advisory firms

find themselves in the technology business, rather than in the advisory business.

Need better streamlined processes and systems

Technology not leveraged effectively


FIGURE 5 How many vendors do you currently work with (outside of custodians)?

More than two-thirds (69%) of firms that participated in our survey work with between three and ten different vendors to run their businesses.


Integrating these systems takes time and money, and complications and trade-offs are likely with a multiple-

vendor platform. Exacerbating the challenge is the rate of technological innovation. Formerly reliable

solutions become outdated quickly and may require expensive or complicated upgrades. Each iteration

creates chaos, confusion for clients and multiple rounds of coordination and compromise. On the other hand,

creating in-house teams to oversee systems can be costly. We believe that strategic outsourcing can simplify

and streamline your day-to-day business. Advisors that realize they’re most effective spending time with

clients, staff and prospects are more likely to see outsourcing as an effective solution.

39 %

More than 10

One totwo

Three tofive

Six toten

7%

19%

50%

25%


What is IT infrastructure outsourcing?The following table shows how we segment the various technology roles. Many—if not all—of these

functions can be outsourced for significantly less than delegating to internal resources.

FIGURE 6

To whom do advisory firms outsource technology support?Our research revealed that half (50%) of the survey participants outsource technology and tech support.

The findings reveal that larger firms with 11 to 20 employees are most likely to outsource the role. Smaller

firms with three or fewer employees are the least likely to outsource technology and tech support

Another insight we gleaned from our survey is that, among those who do outsource, more than half (63%),

rely on local companies that may not have industry experience to support them. Considering the potential

financial and productivity gains you could access with the right outsourcing partner, we believe this is an

important area to reconsider.

Cybersecurity Technology strategy Technology implementation Technology support

› Policies/procedures

› Vulnerability scanning

› Vulnerability

remediation

› Meeting SEC/FINRA

compliance mandates

(audit-ready)

› Insurance guidance

› Cloud/local (server)

strategy

› Devices (phones,

tablets, laptops,

PCs, other firm

technology)

› Industry application

integration (CRM/

financial planning,

etc.)

› Multi-month transition

› Training

› Support desk

› Archival (supporting

FINRA/SEC regs)

› Business continuity


FIGURE 7 Who is your technology outsourcing partner?


Among the advisory industry specialists that provide technology outsourcing services to firms that

participated in our survey are:

› External IT

› Itegria®

› Right Size Solutions

› True North Networks

Why IT outsourcing mattersIT is not core to the value proposition of any advisor. However, it has a significant impact on a firm in terms

of client experience, company morale, efficiency of staff and advisors, and peace of mind.

Our research found that advisors tend to outsource IT more than the industry average—but as a whole,

the industry lags the pace of innovation. On the other hand, firms too often jump on a great idea—maybe

something they saw exhibited at a conference or read about in the trades—but don’t think about how it

will affect the firm’s technology infrastructure. Ideally, advisors should have a good understanding of what

kind of technology they need to support their business model. With a best-in-class approach to IT services

providers, advisors can capitalize on their technology budget and avoid distraction with tools and add-ons

that may divert their efforts.

Local companies

Broker-dealer

I don't know

74%

8%6%12%

Industry outsourcers


Many advisors tend to fall in one of two camps

The “shiny penny” camp The “ostrich” camp

M.O. It’s exciting, it’s new, let’s try it/buy it.

You may need help to find the middle ground

Ignore the trends; let’s keep doing business the way we always have.

The risk

Distraction diverts your attention away from your strategic plan—and too often results in multiple solutions that are

not integrated.

You may need to refresh your value proposition

Fear of change may be preventing your breakthrough.

Cybersecurity IT matters from a cybersecurity perspective as well. In light of recent cybersecurity breaches and

continuing cybersecurity threats against financial services firms, the SEC’s Cybersecurity Examination

Initiative builds on the Office of Compliance Inspections and Examinations (OCIE) to assess cybersecurity

preparedness, including firms’ ability to protect broker-dealer customer and investment advisor client

information. It is a growing threat that requires firms to establish written policies and procedures to keep

data secure and confidential. Itegria®, a leading outsourcing solution that specializes in advisory solutions,

observes that financial services ranks among the most targeted of all industries by hackers; small firms are

particularly vulnerable. Many advisors face the need to defend their network and devices, including filters

for email. In its book “Red Flags,” Itegria® identifies four categories that pose the largest technology risks

to advisory firms5:

1. Backups: Securing and storing copies of your data

2. Disaster recovery: Recovering data and getting back up and running after a disaster

3. IT compliance: Implementing and enforcing controls to comply with industry regulations

4. Cybersecurity: Eliminating risk to protect sensitive financial data from cyber attacks

Technology expensesResearch conducted by InvestmentNews found that spending on technology has increased substantially

over the last several years.6 Their analysis finds that advisors’ top two primary motivations for making

changes are to 1) to improve productivity and 2) to improve the overall client experience. Those who were

motivated most by improving the client experience tend to make major technology upgrades, while those

seeking productivity changes tend to adopt more incremental changes.


FIGURE 8 What is your top consideration when deciding whether to invest in new technology?

Source: InvestmentNews, 2015 Adviser Technology Study, n=300+ firms

According to the survey’s results, the top three software-related expenditures in 2015 were CRM, financial

planning and portfolio management software.

When asked, “Which staffing resource does your firm rely on for installation, implementation, training and

ongoing support?” one-half (55%) identified a third-party consultant or outsourced solution. The balance is

supported by internal resources.

Function % outsourcedConsultants or third parties 34%

Knowledgeable staff (those who know their way around computers but have a different primary role) 30%

Technology outsourcing 21%

Dedicated IT staff 11%

Other 3%

None 1%

Source: InvestmentNews, 2015 Adviser Technology Study, n=300+ firms

Productivity gains

Expected benefit to client

Expected benefit to staff

Increased profitability

More time available to focus on business

development activities

Expected loss45% 33% 7% 6% 5% 3%


Firm at a Glance Founded: 1994, Houston, TX Number of professionals: 5 (3 senior advisors, 2 para-planners); 1 administrative staff member Number of households: 400 AUM: $245 million As of 09/21/2016

One firm’s experience: A conversation with Keith Mitcham, CFP® Partner, Strategic Financial Advisors Situation: As one of three partners, I’m responsible for the firm’s

technology functions. For years, IT support had been performed by a

consultant who did a competent job—but we felt they needed more.

Our biggest IT priorities:

› Technical infrastructure strategy

› Technical support (desktops, laptops, mobile)

› Cybersecurity

› Audit support

Vendor selection. After conversations with three potential technology

vendors, we selected Itegria®, which offers a 360-degree approach to

assessing, managing and monitoring IT infrastructure exclusively for our

industry.

Discovery. The discovery process started with a telephone call. We

talked about how we’d work together, what we wanted to outsource, and

what we wanted to keep within the firm. The question of moving to the

cloud also had to be resolved. Itegria’s business model supports cloud,

local and hybrid network designs. We chose to move the firm’s entire

network to the cloud to capitalize on Itegria’s cybersecurity monitoring

and disaster recovery services. In our view, the cloud route is the way the

industry is going, so why not be ahead of the curve?

Tech assessment and vulnerability report. An Itegria representative took an in-depth look at all of the

technology we use today—and what we planned for the future—resulting in a vulnerability report and a

roadmap of next steps. The report revealed more liabilities than we expected. Frankly, I didn’t know what

I didn’t know. The final proposal was a detailed summary of the cost of their service, customized for our

configuration, and explained in layman’s terms.

Migration. We moved to the cloud over 60 days and started the service aspect. We didn’t upgrade hardware

of software applications. As we upgrade in the future, we believe we now have a strategic partner that can

advise us on technical enhancements and best practices.

Cost. The outsourcing approach increases our monthly IT cost by about one third. It was less than we

expected and a good value for our collective peace of mind. We also found some areas where we could cut

costs, such as moving Microsoft and other administrative programs to the cloud versions. The cost varies

depending on what is outsourced and the number of employees. Typical costs for a firm our size are in the

$150 to $250 per month/per user range.

Risk. The process was a huge eye opener. If the security of our clients’ data is breached, criminals could use the

data for years. One way to protect our firm was to buy an insurance policy so that any costs (either direct

or through litigation) of the effects of a breach are covered. Once you get into it, there is no going back. What

you find out in the assessment of your business ensures that you outsource with a sigh of relief for having

dodged a bullet.


2. Back- and front-office services

Whether you realize it or not, you are already outsourcing at least part of your back and front office, and

we think there is some confusion in this area.

Back-office technology Nearly two-thirds of our survey participants (61%) indicated that they do not outsource their back-office

functions. We think the high response is an indicator that the idea of outsourcing or the definition of “back

office” may be misunderstood, or may mean different things to different people.

For us, back-office functions are the real engine of your business. They include custody, account aggregation,

consolidated performance reporting, automated rebalancing and automated asset location, and they inform

your client relationships in the most significant way. At the very least, if you have a custodian, and most

advisors must, that is an outsourcing relationship. Among firms that do outsource, the leading services that

third parties perform include:

FIGURE 9 What back-office functions do you currently outsource?


By definition, most of these functions sit next to or on top of other systems. If these services are provided

by disparate organizations or managed in-house, they require a great deal of integration to maximize the

technology budget. Conversely, if these functions are provided by fewer outsourcing partners, you can

benefit from a deeper partnership. Integration with your firm’s front-office technology can achieve powerful

economies of scale that can support growth and create efficiencies across your organization.

73 %

Portfolio management

Aggregation

22 %All back-o ce

related activities

1 % Other

77 %Custodyservices

64 %

64 %

Performancereporting

53 %Account

transactions/trades

Statements/billing

46 %48%

59%

Accountreconciliation

Recordkeeping/document

management

8 % Financialplanning

Back-o�ce functions that advisors

currently outsource


Front-office technology We define front-office technology as the client-facing systems and tools that help advisors service clients.

These include dashboards and desktops that provide client and household snapshots; proposal and

client review tools; and CRM and financial planning tools. Too often, standalone technology tools are not

integrated, making it increasingly more challenging to analyze and manipulate data effectively.

We believe the shift toward front-office outsourcing is already in motion. Increasingly, advisors are adopting

client-facing, relationship and data management technology. Additionally, growing consumer demand for

transparency is fueling innovation in mobile and client reporting applications. Rather than distract your

focus by trying to build the systems that capture what you need, consider hiring an outside expert to help

you capitalize on accessing better data as a decision-support tool to drive key aspects of your business.

3. Outsourcing the legal/compliance function

Most firms engage the services of an attorney on an ad hoc basis, for a variety of reasons—including many

that may not be securities-related. Of more importance to the day-to-day operation of an advisory firm is

the mandatory and increasingly complex compliance function. Regulatory scrutiny has intensified over the

past decade, and today’s chief compliance officers (CCOs) take on an enormous amount of responsibility.

Missteps can expose CCOs to liability, regulatory sanctions and serious damage to their careers. They also

can subject their firms to liability, reputational damage and regulatory consequences.

Our survey respondents report that, in an average 40-hour week, they spend 5% of their time, or two

hours per week, on compliance-related issues. If you’re getting audited, forget about doing anything else—

you’ll be quickly immersed in compliance 100%.

Of the 20% of survey respondents who outsource select personnel roles, 32 of those firms outsource the

compliance officer—by far the most common function outsourced to a third party. Still, out of a sample size

of just over 500 respondents, very few firms (6% of our survey respondents) have chosen to outsource the

compliance officer.

Small-to-mid-sized firms have many of the same challenges as larger competitors, but operate with fewer

resources. We believe that, especially for smaller firms with fewer than 10 employees, which represent

about half of all advisory firms and constitute the largest profile of our respondents at 83%, an outsourced

compliance solution can be a significantly effective and affordable solution.

Craig Moreshead of NCS Regulatory Compliance (NCS) explains that the Securities and Exchange

Commission has initiated more frequent and earlier visits to advisors than ever before, and “new concerns

about cybersecurity policies and advisors’ formal succession plans have grown in importance.”7 NCS provides

a range of compliance services to the RIA and broker-dealer community, including a full-outsourced CCO

solution. It also offers unbundled services, including consulting, audit preparedness and risk assessment.

Third-party compliance providers are also capitalizing on technology. “NCS provides an interactive dashboard

for our clients that houses all the firm’s key documents in one place. Our online tools automate routine

compliance management and monitoring tasks, eliminating costly and error-prone manual procedures,”

Moreshead says.


In recent guidance, the SEC emphasized that outsourced compliance officers should have visibility

and prominence within an organization, a deep understanding of the firm’s business practices, and the

experience necessary to identify, articulate and influence management to manage risk. Moreshead

says, “Management will always remain responsible for the compliance culture of their firm, and therefore

an outsourcing solution doesn’t eliminate risk altogether. However, it can reduce risk by bringing in

dedicated, experienced compliance resources, streamlining time management while boosting confidence

that you’re on top of compliance, and doing the best possible job protecting your clients.”

4. The next outsourcing trend: People

The personnel roles our survey participants are farming out

The vast majority of responses from advisors who participated in our survey (80%) do not currently

outsource any personnel roles. Of the small number who do, bookkeeper, compliance officer and

administrative assistant rank among the top three outsourced roles. We expect this area of the

employment landscape to change dramatically in the coming years and believe this may be a significant

opportunity for advisors to explore more carefully.

You could outsource your chief operating officer

Jennifer Goldman, President of MyVirtualCOO, states “Many businesses are outsourcing to enable their

business to ramp up to the next level. They hire us or DIY the build-out of an integrated system of tech and

processes to maximize the use of outsourcers and staff.” The use of expert outsourcers and integrated

systems allows the business to grow without overwhelming the staff or reducing the quality of client

service. She says, “These same businesses have made the mental shift from a practice to a business, and

embrace the expert outsourcers as part of their team.”

Goldman says, “The trifecta occurs when that individual also has worked with a coach and is acting like a

CEO, and where a succession plan is in place and the owner has worked with the successor for a while.”

At that point, she says, the firm is serious and ready to overhaul its operations and enhance the client and

staff experience. “In some cases, advisors just aren’t ready. It costs money; but it’s not just the money, it’s

the time and commitment to take their firm to the next level,” she adds.

Start small. Too often, advisors try to take on massive improvements. Sometimes it’s the smaller things that

give them the extra time or energy boost they need to focus. Jennifer Goldman suggests that a lot of firms

don’t realize how much time and labor is involved in something as simple as appointment scheduling—and

yet, there’s a $49 tool that can alleviate all the back and forth. She says, “The most valuable solutions are

the ones that simplify advisors’ lives and ease their day-to-day.”

Marketing is an obvious outsource solution

Of the small percentage of advisors who outsource personnel, just 17 of the 506 respondents who

participated in our survey outsource the marketing function for their firm. This is an area where firms can

get a sizeable return on their investment. If you’re struggling to keep up with social media, your website

needs refreshing, or you want to enhance your client communications effort, a freelance marketing

professional with investment expertise may be an ideal solution. For example, at UpWork (upwork.com), a

source for freelance workers of all kinds, you can find strategists, writers and social media experts, among

others at rates from $25 per hour to $200 per hour. And, you can post any job there for free. For advice on

how to hire a freelancer, this article from Business News Daily is a good place to start:

http://www.businessnewsdaily.com/5191-freelancer-hiring-tips.html


Doing what you’re good at: A quick little test

Ask yourself, “What am I really good at?” Ask the same question to your staff, your best clients and other

key stakeholders (wholesalers, COIs, OSJs or others). You may be surprised to find out what they think you

are good at. Feel free to ask them follow-up questions or to be more specific. It’s unlikely that you’ll hear,

“You rebalance portfolios really well.” You probably won’t hear, “Nobody reads Morningstar like you do”

to construct that perfect portfolio, or that you have a spotless compliance record. We suspect that you

will hear softer issues like how well you listen, organize and empower client lives, or that you help solve

challenging problems for your clients. This simple exercise may help you see your business in a whole new

light, and may help you refresh your value proposition.

Independent talent segment growingThe part-time/independent talent segment is growing dramatically. More than one in three U.S.

workers—53.7 million Americans—are now freelancing, according to the second annual “Freelancing

in America” survey commissioned by UpWork and the Freelancers Union, published last fall.8 The trend

is evident in PriceWaterhouseCoopers’ recent (March 2016) launch of “Talent Exchange,” a marketplace

where freelance workers can take on project work for PWC clients.9 The differentiators that could make

an impact on your firm’s future are talent (of all kinds) and the technology to work seamlessly beyond the

confines of a traditional office. Here are just a few examples of valuable talent ideas we’re already seeing

in the advisor marketplace:

› Capitalize on synergies with other professionals, and think about putting a CPA or an attorney on retainer

as a way to expand the depth of tax and legal services you can extend to your clients.

› A marketing strategist or project manager can help you fine-tune your value proposition and enhance

your client communications.

› A social media expert can initiate and manage all your tweets and posts effectively and advise you real-

time of your clients’ praise or criticism.

› A part-time CRM expert can help you get the most out of your system.

› A professional event planner can handle all the details for your quarterly or annual client events without

interrupting or distracting your current staff or your daily operation.

› Rather than a full-time receptionist, hire a virtual one; companies like MyReceptionist (http://www.

myreceptionist.com) and Gabbyville (https://www.gabbyville.com) can make a polished impression at a

fraction of the cost of a full-time receptionist.

› Share your receptionist with another professional firm, such as an accountant or attorney.

Reimagine your existing employees in other value-added roles focused on client service and business

development. Or, maybe you don’t need an infrastructure at all. Fresh thinking about how you employ resources

to get work done or defray costs may open new doors and create new opportunities for your firm.


5. The elephant in the room: Frank conversation about outsourcing the investment management roleAt the center of the outsourcing debate is the obvious question for advisors about what their investment

management responsibilities really are. Are you failing to deliver on your value proposition if you delegate

investment management to a third party?

Kevin P. Barr, Executive Vice President, SEI Investments Management Corporation, argues that advisors

have been outsourcing for decades. “Virtually all advisors who use mutual funds or ETFs delegate the

security selection responsibility to an individual or a team that is better equipped to take advantage of

market opportunities in a certain market sector,” he says. To take it to the next level, Kevin suggests

that “Advisors need to acknowledge that mutual fund or ETF outsourcing alone doesn’t really accomplish

all that’s available in the marketplace.”

Investment-related functions our survey participants outsource to third parties

Function % Outsourced

Outsource some investment management related activities 63%

Manager fund research 56%

Portfolio construction all asset classes 54%

Portfolio monitoring 49%

Tax management 42%

Portfolio construction (some asset classes) 39%

Outsource all investment management-related activities 40%

Identity crisis: Without a doubt, there’s a seductive quality about positioning yourself as a money

manager—it’s understandable. But are you really? It’s important to ask yourself candidly whether you

are a money manager or a financial advisor, and at what cost to the firm’s bottom line and your clients’

investment outcomes are you straddling the two fields of expertise? Is this why your clients hire you?

The challenge: Investment markets are more complex, more global than ever; no single individual or small

team has the wherewithal to effectively research and manage all the types of asset classes in constantly

changing markets all over the world. “The level of expertise required of advisors has been magnified,”

Kevin says. “More so now than at any other time, the number of investment options available has increased

many times over. It’s not just the underlying investments, but the plethora of investment vehicles, including

active and passive mutual funds, hedge funds, ETFs, and separate accounts,” he says.


FIGURE 10 Our survey finds that almost half (49%) of respondents agree that investment management is growing too complex.

Advantages of outsourcing investment management: Outsourcing the management of your clients’

portfolios can reduce an important area of risk to your business; it can also boost its value. Delegating

day-to-day investment management and administration to a third party enables you to concentrate on

the relationship and broader, more important issues related to understanding client objectives; setting

meaningful goals; and selecting the best vehicles to accomplish those goals.

Perceived disadvantages of outsourcing: “Investments is the firm’s value proposition” should be

countered with the true value advisors offer clients.

Client perspective: Clients are also savvier than ever. They expect advisors to deliver advice and to bring

innovation and different types of implementation solutions to the table. “That puts even more responsibility

and higher expectations on the advisor to assure clients that they’re working with a trusted partner who

can talk about all the nuances associated with various asset classes,” Kevin says. Historically, an asset

allocation model was composed of stocks and bonds. Today, few advisors would limit the conversation to

simply stocks and bonds. “They’re going to talk about alternatives and other nontraditional asset classes.

In addition, they know that defining the traditional equity and fixed income asset classes into just two

categories is too broad a definition to be used in an implementation context today. Understanding how

asset class correlations can change over time could cause a significant impact on the clients’ portfolio as

well as performance,” he adds.


Agree15%

Somewhat agree34%

Disagree49%

Not sure2%


An advisor’s true value proposition: The vast majority (79%) of advisors who participated in our survey

define their primary service offering as wealth management. An additional 18% describe themselves

as comprehensive financial planning only (6%) or investment/asset management only (12%). If advisors

represent themselves as true wealth managers, Kevin argues, “It’s imperative that they understand all the

elements surrounding a client’s wealth plan.”

Ultimately, he says, the value proposition of a successful advisor starts with the overall picture of the

client. “Enlightened advisors who have made the switch to fee-business recognize the significant

importance associated with truly understanding their clients’ financial lives: their need for asset

accumulation to achieve long-term goals; their cash flow needs; their debt; the tax implications of their

investment choices; their retirement and charitable giving aspirations; and regularly reviewing and

adjusting the financial plan.” There are so many options available to achieve those objectives, he

explains. “Continually evaluating the money managers you outsource to helps ensure that your clients are

achieving the outcomes you and your client articulate. The actual implementation—and finding the optimal

mix of those implementation options—encompasses significant time and resources dedicated to research.”

What to look for in a strategic asset management partnership› The advisor relationship is first and foremost—how the third party treats client relationships, and the level

of support offered to advisors are the most important selection factors.

› Consider the manager’s investment philosophy and methodology. Are they compatible with your

own views?

› Look at expertise and level of resources—how long they’ve been in the business, long-term commitment

to supporting advisors.

› How broad is their scope of solutions? Recognizing that advisors’ clients look different from one another,

you want to have a broad scope.

› The final variable, which is often at the top of the list, is price. In reality, the difference in price on a

client’s portfolio from an advisory standpoint has far less of an impact than the value of the advice—

hopefully the difference between good and bad advice.


The value of time: The financial implications of two distinct practice models FP Transitions® wanted to better understand the contribution that outsourcing plays in the valuation

process.10 In particular, it aimed to quantify the value of investment management-related activities,

including the combination of investment research, execution and ongoing rebalancing. The benchmarking

report, The Value of Time: Quantifying how client focus increases the value of your business, offers an

in-depth analysis of the success factors of two advisory practice models.

When building any business, you need to think forward from the perspective of a future successor or

buyer. Brad Bueermann, CEO of FP Transitions, says “The most important valuation drivers of an advisory

business are satisfied clients and projected growth. The most saleable businesses have fully integrated

systems, workflow processes and value beyond either a single individual owner or a simple AUM formula.”

Similarities of the two modelsSpecifically, this research looks at how two business models compare in terms of current operations and

long-term growth and potential future value: “investment managers” (IM), advisors who focus principally on

the investment process, and “client managers” (CM), those who delegate the investment function to a third

party and concentrate on gathering and building client relationships.

FP Transitions was surprised to find so many similarities between the IMs’ and CMs’ practice models. Both

models have a similar number of employees, are led by advisors of similar age, experience, and number of

years as independent advisors, and serve a comparable client demographic. Generally, FP Transitions also

found profitability for the two models to be similar. They observe that, while IM advisors have higher AUM

per client, CM advisors have more clients and manage more clients per advisor.

Divergence of the two business models: How you spend your time and deploy resources affects the value of your company.The analysis finds that the greatest divergence between the two models is in the way advisors spend

their time. For advisors who manage investments in-house, investment research and portfolio rebalancing

consume the largest share of their time (37%). In contrast, CM advisors spend less than 3% of their time on

research and no time on portfolio rebalancing/services. CM advisors spend the time otherwise consumed

by investment management activities on “asset gathering” and retention activities.

Analysis shows that, on average, CMs spend twice as much time with clients and prospects than IMs do.

CM asset growth from new clients is higher; they add 14 new clients per year, at an average of $322,000,

for a total of more than $4.5 million in new assets. This compares to four new clients per year, on average,

for IMs at approximately $469,000, for a total of $2.3 million in new assets. Total asset growth, which

includes new money from existing clients, plus new clients, plus portfolio growth tells a more complete

story: A growth rate in AUM of 18% for CMs vs. 11% for IMs yields significant results.



Key takeaways› Delegating the investment management function can free up more

than one third of investment advisors’ time and may work best for

firms focused on growth and those with larger client bases.

› The way that advisors spend their time—either focused on investments or

the client—makes a difference and has implications for value.

› Focusing on the client builds assets at a faster rate than focusing on

investments. On average, CMs in the study add twice as much in AUM

($14.5 million) annually, as compared to IMs with $7.2 million in total

asset growth. CMs also add an average of 14 new clients per year,

compared to four new clients per year, on average, for IMs.

› Over the long run, a focus on the client builds a greater firm value and

a higher return on the use of the advisor’s time.

› Based on FP Transitions’ assessment, the difference in accumulated

value between the CM model vs. the IM model accounts for

approximately $1 million over 10 years.*

*Growth projections presented here are hypothetical and provided for illustrative purposes only.

Five steps you can start now to build a profitable advisory businessWe know that changing a business model isn’t for everyone, and there are a lot of things you should consider before you do. That’s why we’ve built this five-step process, with practical examples and suggestions for you and your firm to consider.

1 Decide what type of business you want to run. Are you looking for a lifestyle practice that gives you the flexibility you want while maintaining

your status quo? Or do you want to build your enterprise value and grow your business?

There’s no right or wrong answer.

Start by figuring out your P&L and your ongoing expenses. Then take a look at your overall

growth rate. Last, and we’ve said this before in our Fees at a Crossroads white paper, know

your cost per client. Use your CRM to find this data:

› Work out your hourly rate

› Work out how much time you are spending on each client

› Identify the gross client revenue from each client

Description Example

Hourly Rate (HR) = Gross revenue/50 working weeks per year/5 days per week/7 working hours per day

GR is $500K, then HR is $286/hour

Time spent with the client is your hours spent on prep for meetings, client meetings, calls with client and portfolio management

Example: 10 hours per client

Client revenue is calculated from advisory fees, 12(b)1s, and any other ancillary fees

Example: Client with a single AUM fee of 100BPs on $500,000 = $5,000 25BPs on $500,000 = $1,250

Your time expense alone is $2,860. How does it compare to your total fee?


Find out what your clients think of you and your firm.Due to lack of time and resources, many firms are not conducting client satisfaction surveys

on a regular basis. However, there’s no better way to learn what your clients are thinking and

head off any potential issues before it’s too late.

A survey can identify additional nuggets for you as well. Perhaps your clients wished you

offered additional wealth management services such as tax planning, or they would prefer to

hold meetings virtually instead of in person. This could be your best opportunity to find out

what is in the mind of your clients.

You can hire a professional, like ActiFi, who can help you implement a meaningful client

engagement survey, or. you can do it yourself with a survey company such as Survey Monkey

[www.surveymonkey.com]. From simple to sophisticated, these firms allow you to build your

own surveys online, even giving you templates.

› Find out from your clients, partners—ask them what you’re good at.

› Analyze the responses about yourself and your firm.

Reimagine what your business could be.› Host an off-site meeting with your team to talk about your client survey findings.

› Start to think about how you could address what your firm does well and where it falls short.

› Identify changes to your services and any new resources that you will need to provide your

current and new services.

› Show your clients what you learned to prove the point that you’re working in their best interest.

2

3


5

4 Refine your value proposition.› Your value proposition should align with what you have reimagined your firm to be and

clearly articulate what it is you deliver.

› Bottom line—there are three steps to unlocking your value.

• DEFINE YOUR CUSTOMER:

Who is your customer/target market?

• DEFINE THEIR PROBLEM:

What problem are you solving for the customer?

• DEFINE YOUR SOLUTION:

What is your unique solution for the problem?

› We’ve written a great deal on the subject. Contact us if you need help getting started.

Map out how you will get there. › Assess where a third party makes the most sense by asking yourself these questions. Your

answers may lead you to surprising new ways of thinking about your business.

• Where should I spend my time? Client service? Prospecting?

Compliance? Investments?

• What are the things I enjoy doing most—and that I’m good at?

• What are the tasks I have to do, but enjoy the least?

› Conduct a financial review of the costs associated with various tasks. What are you paying

(employee time, management time, systems support, etc.) to deliver your services to your

clients?

› Engage your staff. Ask them what are they good at and like to do; conversely what do they

do that they don’t like?

› Conduct a financial review of the costs associated with various tasks. What are you paying

(employee time, management time, systems support, etc.) to deliver your services to your

clients?

› Engage your staff. Ask them what are they good at and like to do; conversely what do they

do that they don’t like?

› Together, explore options that may free up some of your time to concentrate on your firm’s

most important priorities. Leverage your current vendor relationships to get help with an

effective plan.


Special thanks to our contributors, Kevin Barr of SEI; Keith Mitcham of Strategic Financial Advisors; Jennifer Goldman of My Virtual COO; and Craig Moreshead of NCS Regulatory Compliance.


About John AndersonJohn Anderson is the managing director of Practice Management Solutions for the SEI Advisor Network.

He is responsible for all programs focused on helping financial advisors grow their businesses, create

efficiencies in their operations and differentiate their practices. John is frequently quoted in publications,

such as Investment News, Financial Planning magazine and The Wall Street Journal, and is a frequent

speaker at broker-dealer conferences, client seminars and other industry forums. He is also the author of

SEI’s practice management blog, “Practically Speaking,” found at seic.com/practicallyspeaking. Alongside

his practice management responsibilities, he also manages a team that provides investment research, case

support and analysis to bolster the efforts of SEI’s advisors.

About Raef LeeRaef Lee serves as a managing director and head of New Services and Strategic Partnerships for the

SEI Advisor Network. He is responsible for the identification of new services and markets. Raef defines

new product offerings for advisors either by partnering with best-in-class companies or shepherding the

requirements into SEI’s development teams. In addition, Raef identifies ways for the SEI Advisor Network’s

innovative business model to be leveraged in new markets.

About Brad BueermannBrad Bueermann, CEO of FP Transitions, is a nationally recognized speaker and thought leader on matters

of business value and equity management for independent financial professionals. Bueermann has been

active in the merger and acquisition market for most of his career, beginning with Citibank in Milan, Italy,

before moving on to ventures with the Christie Group, as well as private brokerage. He is the creator of FP

Transitions’ Comprehensive Valuation Report, the industry’s standard for valuation, relying on the largest

proprietary database of independent financial businesses in the U.S.


About The SEI Advisor Network The SEI Advisor Network provides financial advisors with turnkey wealth management services through

outsourced investment strategies, administration and technology platforms, and practice management

programs. It is through these services that SEI helps advisors save time, grow revenues, and

differentiate themselves in the market. With a history of financial strength, stability, and transparency,

the SEI Advisor Network has been serving the independent financial advisor market for more than

20 years, has over 7,000 advisors who work with SEI, and $55 billion in advisors’ assets under

management (as of September 30, 2016). The SEI Advisor Network is a strategic business unit of SEI.

For more information, visit seic.com/advisors.

About FP Transitions®

FP Transitions is the leading provider in the equity management, succession and mergers and acquisition

space for the financial services industry. As the trusted partner, FP Transitions helps independent advisors

build businesses of enduring and transferable value. Since 1999, FP Transitions has operated the largest

open market for buying and selling independent financial advisory practices. Its team of 40 professionals

are experts at analyzing the intangibles that make a financial services practice unique and valuable, as well

as helping advisors manage the equity they have built in their businesses over a lifetime of work. Using

their experience in valuing over 8,000 independent businesses, FP Transitions assists advisors in arriving

at a plan of succession designed to realize value for the founder and perpetuate the business for the next

generation of advisors. For more information on FP Transitions, visit fptransitions.com.


Contact an SEI representative for more information, insight and guidance about steps you can take to maximize your business and spend more time with clients.

Visit seic.com/advisors or call 888-734-2679.

©2016 SEI 161799 ( 12/16)

1Time Management and Productivity Study, (2014). The FPA Research and Practice Institute™ (https://www.onefpa.org/business-success/ResearchandPracticeInstitute/Documents/FPA%20RPI%20Report%20-%20Doing%20More%20With%20Less%20-%20April%202014.pdf.

2Ultimate Success Formula, CEG Worldwide E-book; 4.5.16

3http://www.investors.com/news/management/financial-advisor-briefing/to-outsource-or-not-to-outsource-new-options-offer-better-choices/

4http://www.mckinsey.com/mgi/overview/in-the-news/how-many-of-your-daily-tasks-could-be-automated

5http://www.itegria.com/knowledge-center/

6Investment News, 2015 Adviser Technology Study [survey responses from 300+ firms]

7National Compliance Services Inc. and Regulatory Compliance LLC, two of the nation’s longest-serving regulatory compliance consulting leaders, merged to form NCS Regulatory Compliance in October 2015.

8https://www.upwork.com/press/2015/10/01/freelancers-union-and-upwork-release-new-study-revealing-insights-into-the-almost-54-million-people-freelancing-in-america/

9http://fortune.com/2016/03/07/pwc-freelance-marketplace/

10Source: FP Transitions. FP Transitions’ internal database of more than 8,000 valuations of investment advisory practices conducted over the last 10 years formed the basis of its comprehensive research. The analysis compared two business models in terms of current operations and long-term growth and value. Client Managers were segmented based on less than or equal to 5% of owners’ time spent on Investment Research and less than or equal to 5% of owner’s time spent on Portfolio Rebalancing. Investment Managers were segmented based on greater than or equal to 10% of their time spent on Investment Research and greater than or equal to 10% of time spent on Portfolio Rebalancing. The Middle Group fell in between the other group’s thresholds. Once defined, CMs and IMs represented 50% of the total sample size.

Information presented by SEI Advisor Network, a strategic business unit of SEI Investments Company (SEI). Services provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI.

SEI and FP Transitions, Strategic Financial Advisors; My Virtual COO; and NCS Regulatory Compliance are not affiliated.

Opinions expressed by third parties are their own and SEI cannot assume the accuracy of the information provided.

SEI has strategic relationships with third party service providers including FP Transitions and NCS Regulatory Compliance discussed in this material. The experiences of the firms highlighted here may not be representative of all firms’ experiences.

Growth projections presented here are hypothetical and provided for illustrative purposes only. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.

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