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| 2. | Portfolio Management Engine |
Sub-accounting, trade and order routing, and reporting technology is the core portfolio management technology that drives the advisors practice. Integrated Decision Systems (IDS) and Eagle are web-based sub-accounting, trade and order routing, and reporting technologies that are highly conducive to innovation, requiring less time and expense to incorporate other web-based technologies. IDS and Eagle facilitate real-time information, lending relevancy to a new generation of web-based analytical tools, which greatly elevates the advisor's counsel. IDS and Eagle have tax lot accounting, are multi-currency and can handle domestic and international securities, both equities and fixed income. CheckFree Investment Services is also a well-known vendor in this space. The technological breakthrough in sub-accounting, trade and order routing, and reporting technology is that through gating technology (Upstream) gates can be built on all the investment and administrative values (risk, return, etc. and their associated metrics) cited in the investment policy so that any transaction that takes a client's portfolio outside of the investment parameters defined by investment policy will be electronically suppressed and managed-by-exception by the advisor. This gating technology electronically ties investment policy to the portfolio management function so that the portfolio is always in compliance with investment policy, thus making the compliance risk of a discretionary account far less than that of a conventional brokerage account.
The second major technological innovation in sub-accounting trade and order routing, and reporting is overlay management, which outsources the management of a level of portfolio detail, like tax efficiency, to third-party firms (Placemark, Parametric, Tamarac) which, in turn, through expert systems, generate a level or expertise and counsel that is far beyond the ability of the advisor. It is possible that even values like alpha can be outsourced and managed by overlay managers, which is the next generation of innovation to occur in overlay management. Because core portfolio management technology is web-based and geared to real-time information, extraordinary analytical and diagnostic tools previously cited can be readily integrated and used to electronically monitor, manage and report portfolio performance in real-time.
One important innovation not previously mentioned is trade execution cost measurement provided by Abel Noser and Upstream, which helps the advisor disclose and evaluate transactions cost and secure best execution, as required by regulatory mandate.
| 3. | Custody, Trade Execution, Clearing and Reporting |
Traditionally, the role of the firms that support financial advisors has been custody, trade execution, clearing and reporting, as well as providing product access. Depending upon whether the advisor is an employee or an independent contractor, facilities management and support can also be provided at a lower pay-out to the advisor (40% of gross revenues versus 80%). The technology cited in the Technology Blueprint reflects a much broader mandate than traditional custody, trade execution, clearing and reporting technology, in that it empowers the financial advisor to fulfill their fiduciary responsibility in addressing and managing the full range of investment and administrative values required by regulatory mandate.
Though custody, trade execution, clearing and reporting technology is the common denominator between commission sales and high level counsel, the innovation is in how those services are priced and managed. In commission sales, there is little cost pressure on custody, trade execution, clearing and reporting. Yet, if you are engaging your counsel for a fee and it is your only means of compensation, the higher the cost of trade execution, custody and asset management, the less latitude the fee-based advisor has to charge for their services. Thus, fee-based counsel acts as a buying agent for the client securing best-in-class services in custody, trade execution and asset management at the most reasonable cost possible. This is in contrast to commission sales, which seeks to maximize commission cost. Thus, electronic crossing networks (ECN's) like Charles Schwab, Fidelity and Ameritrade, have had great success in offering product access and low cost custody and trade execution reporting to advisors who are only engaging their counsel for a fee. Because these advisors do not engage in commission sales, there is no need for their being licensed for commission sales or to be affiliated with a broker/dealer. In effect, they achieve a 100% pay-out. Importantly, the next breakthrough is for ECN's not to charge for individual securities transactions but to move to fixed cost pricing. One major ECN is considering offering product access, custody, clearing and reporting for 5 basis points or $50,000 for practices that custody $100 million or more in assets. For large practices, the price can go as low as 2.5 basis points. ECN's can be extremely profitable, even without charging a commission for trade execution because their profit is derived from the margin between the buy and sell prices of the massive volume of securities they trade. Schwab, Fidelity and Ameritrade are essentially bringing wholesale pricing for trade execution to the fee-based advisor.
This begs the question: If "full service" firm is not providing the processes and technology necessary for the advisor to add value and fulfill fiduciary responsibility, then what do they bring to the table to justify their 60% share of the advisor's gross revenues? Product access and facilities management does not command that premium. The High Net Worth Standards Initiative would suggest that providing the enabling processes and technologies necessary for the advisor to add value and fulfill their fiduciary responsibility would be in order. The acknowledgement and fulfillment of fiduciary responsibility is the means by which the industry will regain the investing public's trust, elevate the role and counsel of the advisor, and enhance the earnings, margins and multiple of its leading advisor support firms.
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| 4. | Fiduciary Responsibility Compliance |
The High Net Worth Asset/Liability Study Working Document, published by the High Net Worth Standards Initiative, sets forth 248 points of information that must be managed in order for the advisor to act in their client's best interests and fulfill their fiduciary obligations. Each of these points requires documentation and management, and are best organized and tangibly manifested as supporting formal documentation for each of the six financial services (Asset/Liability Study, Investment Policy, Strategic Asset Allocation, Manager Search and Selection, Performance Monitor and Tactical Asset Allocation) implied by regulatory mandate (UPIA, ERISA, UMPERS, UMIFA) to fulfill fiduciary responsibility. The 248 points of information that must be managed and documented, in effect, constitute the parameters of a fiduciary liability audit, as well as the Asset/Liability Study, which evaluates all the client's holdings prior to investment and administrative recommendations being made. (See Center for Fiduciary Studies for their Accredited Investment Fiduciary Auditor program which credentials [AIFATM] advisors to perform a fiduciary liability audit.) Most of the 248 points of information that must be managed are perfunctory functions that lend themselves to automation or are reporting or disclosure functions that are well suited for automation. Very few go beyond the capability of a skilled financial advisor and those who do are readily mitigated by training and access to enabling process and technology. Thus, the easiest part of enabling technology and processes – the formal documentation for the Asset/Liability Study, Investment Policy, Strategic Asset Allocation, Manager Search and Selection, Performance Monitor and Tactical Asset Allocation – into meaningful, tangible client deliverables, is the only thing that stands in the way of the industry democratizing the processes and technology necessary for the advisor to add value and fulfill their fiduciary responsibilities. By virtue of the advisor working within such a process, the advisor, their clients and their supporting firm would be virtually assured of the advisor fulfilling their fiduciary responsibilities. This is the long-sought elevation of the role of the financial advisor and the counsel they provide, which is highly desired by the financial services consumer, that the High Net Worth Standards Initiative hopes to achieve with this Technology Blueprint.
Conclusion
All investors prefer their advisors to act in their best interests and expect them to address and manage the full range of investment and administrative values required by regulatory mandate. Thanks to breakthrough technological innovation and the transparency of the internet, it is within the reach of the financial services industry to empower all financial advisors to add value and fulfill their fiduciary responsibility. This is an idea whose time has come. Eighty percent (80%) of the empowering technology is in place and that which isn't, is readily manageable. The purpose of the High Net Worth Standards Initiative is to foster technological innovation and adoption that would elevate the financial services industry and elevate the role and counsel of the advisor, by reducing the labor intensity of high level counsel. To that end, the High Net Worth Standards Initiative has defined the breadth and depth of counsel for the high net worth investor in its High Net Worth Asset/Liability Study Working Document and has defined the enabling technology required to facilitate high level counsel in this Technology Blueprint.
We hope these documents will foster dialogue between advisors and their firms, dialogue between CEOs of our support firms and their COOs, dialogue between venture capitalists and technologists, dialogue among "full service" firms, ECN's, and independent firms on the opportunity to make an important contribution in support of innovation and the investor's well-being. In this age of transparency brought by the internet, where investor confidence and trust has been shaken, the investor stands to greatly benefit from faster, better and cheaper counsel, which will reorder the financial services industry on the basis of the depth and breadth of counsel the financial advisor provides. The fulfillment of fiduciary responsibility and the assurance that the financial advisor is acting in the investor's best interests is becoming readily discernable and essential in order to compete in the marketplace that is emerging. Thus, it is in the best interests of the industry, the advisor and certainly the investor, that investment and administrative counsel necessary to win back the investing public's confidence be supported with whatever resources are required to assure the client's best interests and well-being are being served.
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