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Technology Blueprint

Elevating the Financial Advisor's Counsel Beyond the Human Capacity to Reason

The counsel of a financial advisor has always been limited by the information which is available and the technologies which can be used to manage that information. With the advent of the web, real-time information and account transparency, today we have access to far better information than ever before, which lends new relevance to web-based technologies and analytical tools. This information and these analytical tools take professional investment and administrative counsel far beyond the capacity of a human being to reason. By leveraging the financial advisor through processes and technology, an unprecedented level of professional investment and administrative counsel can be facilitated. The long-desired goal of the advisor being empowered to fulfill their fiduciary responsibilities, as required by regulatory mandate, can be achieved.

The financial services industry today is precisely where the medical profession was before the advent of diagnostic, evaluation and treatment technologies that greatly expanded the range of consideration and elevated the judgment of physicians. Similarly, through technology, the role and counsel of the advisor is greatly elevated. Scientists tell us that, as human beings, we are only capable of thinking in three-dimensional terms. If we tried to think in the fifth or tenth dimension, we could not fathom 25 or 100 possible interrelated outcomes. In that context, consider what we, as financial advisors, are asked to do every day.

As a financial advisor serving 500 clients, if we were to address and manage the values of risk and return, tax efficiency, liquidity, cost structure and time essential to our client's success and required by regulatory mandate, using the 10,000 investment options at our disposal, each having at least 100 description points, we would have to manage a 3,000,000,000 dimensional equation without enabling resources, all within our heads. Clearly, if we cannot fathom 25 or 100 possible interrelated investment outcomes, how could we fathom three billion possible outcomes? Clearly, process and technology are needed for the advisor to manage all this information in terms meaningful to the client.

What is different about today than five years ago, is that most of the processes and technology necessary to foster high level counsel exist. More importantly, today we can even identify the technological holes that need to be filled in order for all advisors to have access to the enabling processes and technologies necessary to add value and fulfill their fiduciary responsibilities. The level of counsel possible today simply was not possible earlier without the web and enabling processes and technology. Thus, the investors and the industry's definition of high level counsel is changing in profound ways, as is the advisor's value proposition. Just as the medical profession has evolved from its early roots, the financial services industry is evolving from its roots in commission sales, as our clients are rightly requiring that value be added and their best interests be served through the fulfillment of our fiduciary responsibility.

What is the technological configuration that will facilitate the financial advisor addressing and managing a broad range of investment and administrative values which constitute continuous, comprehensive counsel required by regulatory mandate? As an extension of the High Net Worth Standards Initiative's High New Worth Asset/Liability Study Working Document which defines the depth and breadth of counsel required of financial advisors, the High Net Worth Standards Initiative has developed a Technology Blueprint, which follows. This Technology Blueprint makes advisors and their supporting firms aware of what it means to act in a client's best interest. This is important because our industry's most able financial advisors are compelled by their professional integrity to act in their client's best interests, as established by the public policy created by our state and federal legislative bodies. The fiduciary responsibilities of the financial advisor, as cited in UPIA, ERISA, EMPERS, and UMIFA have been clearly delineated. Breakthrough technological innovation has occurred and continues which democratizes access to the processes and technologies that address and manage the full range of investment and administrative values required by regulatory mandate to fulfill fiduciary responsibility.

This Technology Blueprint establishes the technology necessary for advisors and their supporting firms to comply with state and federal legislative mandates that definitively establish the fiduciary responsibilities of the financial advisor. The mission of the High Net Worth Standards Initiative is to win back the faith and confidence of the investing public by facilitating the adoption of the enabling processes and technologies necessary for the advisor to fulfill their fiduciary obligations to their clients.

As you will see, most of this technology exists and that which doesn't is not particularly complex, being disclosure- and reporting-related, and is described in great detail. The Technology Blueprint creates a context in which one can see the functional importance, the interconnectivity and the value of all the technological component parts. The Technology Blueprint fosters technological innovation and adoption that will empower all financial advisors to:

1.   reduce the labor intensity of high-level counsel,

2.   to provide continuous comprehensive counsel in addressing and managing the full range of investment and administrative values as required by regulatory mandate and,

3.   to fulfill their fiduciary responsibilities.

The value of the Technology Blueprint is that it enables technologists, systems and operations personnel within the financial services industry, who are more familiar with commission sales, to understand the different technology required to support financial advisors in engaging their counsel for an on-going advisory fee. For financial advisors who wish to provide continuous, comprehensive counsel, as implied by regulatory mandate, the value of the Technology Blueprint is that they can articulate what they need in technology in order to add value. The financial advisor should not be forced to reinvent the wheel in developing their own processes and technologies within their practices in order to add value, as is the case today. Clearly, a low-cost institutionalized technology with scale is preferable for elevating the role and counsel of the advisor to having each financial advisor struggling to cobble together their own systems with varying degrees of success. This argues for the democratization and institutionalization of the processes and technologies necessary for the financial advisor to address and manage the full range of investment and administrative values required by regulatory mandate.

In today's highly competitive business environment where the size of the recruiting bonus is the primary point of differentiation among firms, the highly coveted fee-based advisor with substantial assets has huge influence in shaping the course of the industry. If advisors with substantial fee-based advisory practices were to demand a second imperative in addition to their recruiting bonus – that the supporting processes, technologies and infrastructure be provided – that would allow them to "act in their clients' best interests" and fulfill their fiduciary obligations, the industry would change overnight. How many recruiters would bone up on high level counsel and fiduciary responsibility if it became essential? All of them.

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This takes the process and technology business consideration from the COO level to the CEO level and mitigates the dilemma of chief operating officers, who are constrained by legacy systems, who do not have the latitude to envision or execute a more dynamic, even disruptive, use of technology for the benefit of all and who view breakthrough technological innovation as being unattainable. If top management is interested in keeping and attracting the industry's most able and capable financial advisors, they will find a way to serve. Thus, the Technology Blueprint, which follows, empowers the most influential constituency within the financial services industry – highly successful fee-based advisory practices. The Technology Blueprint empowers these advisors to clearly delineate readily identifiable technology necessary in order for them to address and manage the full range of investment and administrative values required by regulatory mandate. Though it is clear that smaller, more nimble firms without cultural, structural and technological inhibitions can more easily execute breakthrough technological innovation, mitigating the scale and resource advantages of larger firms, larger firms must not lose sight that ultimately all successful advisors will be compelled by market forces to fulfill their fiduciary responsibilities as required by regulatory mandate. Thus, the adoption of technological innovation and the empowerment of the financial advisor to add value is inevitable.

The breakthrough achieved by the industry adopting technological innovation is that, by virtue of the advisor working within the context of an investment process and its associated enabling technologies, the advisor is virtually assured of fulfilling their fiduciary responsibilities and adding value. The financial advisor, empowered by process and technology, becomes the value added. By extension, you, the highly successful financial advisor will shape the course of the financial services industry by simply exercising your influence in expressing the imperative that you be empowered by the processes and technologies necessary to add value. The democratization of high level counsel greatly elevates the advisor, their counsel and the industry to the highest common denominator of the fulfillment of our fiduciary responsibilities from the lowest common denominator of trade execution.

The Technology Blueprint

The traditional role of the firms that support us has been to provide research, product access, custody, trade execution, clearing and reporting. Historically, the industry's focus has been on product distribution and trade execution, not adding value. The advice that is supported is limited to products like mutual funds or mandated accounts, structured as wrap fee programs, not advice on all the client's holdings. By extension, the industry's technological focus has been on the automation of the manual functions associated with trade execution, so transactions can be facilitated and managed in volume to achieve operating scale and lower costs. Today, client profiles are offered in lieu of investment policy statements. Performance reports are provided on a client's assets custodied within the firm by account, but not on all the client's assets custodied inside and outside the firm essential in order to add value. Fiduciary responsibility is not acknowledged, as firms maintain that advisors are making clients aware of investment alternatives rather than making well-reasoned investment recommendations. The role and counsel of the advisor is minimized to the lowest common denominator of trade execution. The culture, structure, and technology of the industry is geared to facilitating trades in volume, not to adding value and fulfilling fiduciary responsibility – and thus the conundrum. With the internet creating transparency in account performance, with the prolonged decline in commission brokerage rates, with the desire of the investor that value be added, with the regulatory mandate that fiduciary responsibilities be fulfilled and with breakthrough technological innovation making it possible for financial advisors to add value and fulfill their fiduciary responsibility, it would seem the convergence of market forces suggest the industry should elevate the role and counsel of the financial advisor to the highest common denominator in the fulfillment of fiduciary responsibility. Thus, the Technology Blueprint is instructive on what is required in order to empower the financial advisor to address and manage the broad range of investment and administrative values required by regulatory mandate.

As you will see in the outline on the next page, there are four major categories of technology, each having readily identifiable components necessary to empower the advisor to add value. The four categories of technology are:

1.   Database Manager/Warehouse
2.   Portfolio Management Engine
3.   Custody, Trade Execution, Clearing and Reporting
4.   Fiduciary Responsibility Compliance

Eighty percent (80%) of the technology necessary for the advisor to provide continuous, comprehensive counsel exists and is cited by vendor. The remaining 20% is defined in great detail, is disclosure- and reporting-related (pertaining to fiduciary responsibility) and readily lends itself to automation. The point of technology/automation is to remove the burden of advisors developing and managing important operating details that are more accurately, more quickly and less expensively executed through automation.

As you have seen in the High Net Worth Asset/Liability Study Working Document, none of what is required to fulfill our fiduciary responsibility is particularly complex in its own right, but when all that is required is considered as a whole, the details that must be managed are almost overwhelming – thus, an industry opportunity to create a process and associated technology that would allow an advisor, by simply working within a process, to add value and to fulfill their fiduciary responsibilities. The technologies cited below will ultimately take you and your firm deep into this process. (See Senior Consultant, November 2003, "Enabling Technology and Infrastructure" for a description of technology in the context of process.)

It should be noted that commission sales is still the reference point and the industry standard for how a prudent man should behave. Yet, when it is possible for the financial advisor to provide a much higher level of counsel, a new definition of prudence and a new industry standard are created. A prudent expert empowered by real-time information and a new wave of web-based technologies designed to facilitate the continuous. comprehensive counsel implied by regulatory mandate, will increasingly become the industry standard for prudence. Not just because it elevates the professional standing and stature of the financial advisor, but because it is the means by which the advisor will add tangible, quantifiable value; fulfill their fiduciary responsibility; greatly increase their assets under advisement and aggressively grow the recurring fee revenues they earn.

The technologies cited on the next page usher in an entirely new era within the financial services industry where the depth and breadth of counsel and the values addressed and managed will be readily transparent to the investor. This elevates the role and counsel of the advisor to the highest common denominator of fulfilling fiduciary responsibility from the lowest common denominator of commission sales and trade execution.

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