One of the big 2006 technology projects underway at investment dealer Edward Jones is to integrate financial planning software with the information in the firm’s portfolio-management system.

“We want the ability to have a fully integrated plan,” says Gary Reamey, head of Canadian operations in Mississauga, Ont. The firm is taking the popular NaviPlan financial planning software from Emerging Information Systems Inc. of Winnipeg and customizing it “so all the data is integrated.” That way, it will be simple for advisors to create detailed plans.

Technology is at the forefront of stockbrokerage firms’ business-building efforts. Firms operating in the capital markets spend billions of dollars annually on technology as they look for ways to cut their costs and build a better business model to serve clients and investment advisors.

In North America, Edward Jones spends $250 million a year on technology. “I think for us the goal is to build the infrastructure to serve our customers better,” Reamey says, “while at the same time making it easier with changes in technology for investment representatives, branch offices and administrators to build business.”

“The business model is moving away from the transaction-based brokerage to one that is much more holistic and much more relationship-oriented,” says Matt Bienfang, an analyst at TowerGroup Inc. , a financial services research firm based in Needham, Mass. “You have to manage the relationships to maintain and retain clients.”

The old days of the broker calling the client with a good idea are gone, he says: “Today, you need to engage clients on a regular basis … and keep clients informed.”

Each year, TowerGroup identifies the top 10 business drivers and the corresponding technology responses that retail brokerages need to deploy in order to address them.

> Compliance tops agenda

Compliance continues to sit at the top of the charts. Bienfang writes in his report that the retail brokerage has “borne the brunt of regulatory scrutiny and regulation. The speed with which the regulatory and legislative pressures have hit the brokerage industry has pushed firms back onto their heels.”

“You have to keep up,” agrees Reamey, adding that compliance extends beyond the simple monitoring of accounts to ensure suitability; it also means preparing for issues such as the arrival of do-not-call lists in Canada and managing existing privacy legislation.

“Risk mitigation is vital,” Bienfang says. “[Firms can] seize the opportunity to regain their balance and take a more strategic approach to their overall challenges with compliance.”

That means taking a more holistic approach to compliance and managing it across the enterprise, not just individual business lines.

> Pricing pressures

Bienfang says discount brokers are challenging the traditional pricing model and driving down consumers’ trading costs. “Clearly, it’s hard to make money from $9 trades,” he says. That’s forcing more firms to adopt the fee-based model, resulting in pricing pressures there as well.

Firms have to examine their client base and assets to determine what they can afford to give clients, says Bienfang: “Where can I still capture margin and make it worthwhile?” And firms must also hold on to those profitable clients.

The technology solution is using systems that manage client data and provide a better picture of the client to improve a firm’s productivity. “Understanding a client’s family relationship is critical to retaining assets effectively that might otherwise leave,” he says. It also means reducing redundant input, streamlining workflows and improving client analysis and reporting systems.

> The changing demographics

Baby boomers are nearing retirement and will be shifting their assets into safer havens. As well, changing immigration patterns and increased life expectancies mean investment firms will have to cater to a more diverse audience with broader demands than in the past.

> Convergence across lines

The business is consolidating and firms are becoming one-stop wealth shops, delivering a greater range of financial products and services. Real-time workflow solutions are needed to keep information current and allow it to flow across multiple software applications. Forms can be filled with existing data, which can be shared across an organization so changes in a client’s information will be picked up by all the systems managing the data.

> Maturing market segments

Historical growth rates are under attack. The large migration of investors from GICs to mutual funds and from the offline to the online world with discount brokers is finished for the next five to seven years, according to Bienfang. The next wave will be the “upswell in retirees,” who will begin to move assets in large amounts to the products they need to sustain cash flow in retirement. In the interim, firms need to focus on their information-technology architecture and build open systems that can speak to one another.

@page_break@Gavin Little-Gill, an analyst with TowerGroup, says the last time financial institutions took a good look at their “core IT architecture” was prior to the date changeover in the year 2000. “They spent a ton of money replacing a lot of that,” he says. Then they clamped down on their spending. However, computing has changed a lot since 1998, when many of those projects began, and it’s now more commoditized and cheaper.

Now, he says, new firms can launch and buy portfolio accounting systems that give them their profit-and-loss statements in real time, so they know what their exposure is. Some firms using mainframe accounting systems, Little-Gill says, “don’t know what they have today until tomorrow.”

Scott Ellison, a partner at Rudderham Norwood Ellison Investment Counsel in Halifax, found out the state of today’s portfolio accounting systems when he and his partners launched their firm a few years ago. Rudderham went with the FMC online suite of products that integrates portfolio accounting with TD Waterhouse Canada Inc. ’s trading platform. The software allocates trades to accounts and ensures best execution so clients are treated equally in terms of trade pricing. It also has safety features to keep trades compliant with suitability rules.

“The debits and credits line up at the end of the day,” Ellison says. “We don’t have any accounting staff on site.” Instead, the portfolio vendor provides back-office support, and Ellison and his partners focus on managing money and acquiring clients.

Ellison’s office is wirelessly connected to the Internet. He says technology has advanced greatly: “I don’t think we would have been able to create an independent money-management firm from Halifax 10 years ago.”

> Technology innovation

The Internet has now become the backbone for connecting with the client. It has driven down trading costs and allowed for greater advisor mobility. Online customer relationship management and online education initiatives will also be important, Bienfang says. Firms will need to make full use of the systems they have and create multiple delivery channels.

For example, Raymond James recently made it easier for advisors to open accounts online, says company spokesman Peter Kahnert. “What could have taken weeks can now be done in minutes.” The technology allows advisors to open accounts quickly and accurately, he says, instead of “drowning them in paperwork.” It has enhanced efficiency and productivity, and improved customer service.

> Advisor productivity

Bienfang says CRM — “the dirty word” — is in vogue again. “There is renewed interest in customer relationship management tools,” he says. “At the end of the day [firms] have to provide brokers with the tools to help them acquire clients and assets … and capture more share of the wallet.”

Kahnert says CRM is high on his firm’s priority list for 2006. “We know it is something our financial advisors are telling us they want to find better solutions.” He says the firm’s U.S. office is in the process of launching a new CRM system. “We will see how that unfolds over the next few months. Hopefully, we will be able to replicate that.”

A needed CRM change , Bienfang says, is that “advice tools must be enhanced for the income-planning period.” Planning software can map out scenarios, but few address the impact of annuity streams in their simulations, which cause advisors to miss out on the opportunity to cross-sell products to clients.

Financial data aggregation is also key to serving the changing client base, Bienfang adds. Knowing a client’s full financial picture can help determine the additional services a firm can provide. So account-aggregation technologies and tools that allow advisors to track more than a client’s portfolio are necessary.


> Wealth transfer

The generational transfer of wealth in the U.S. between 1998 and 2052 will range from US$40 billion to US$136 trillion, according to the Boston College Center of Wealth and Philanthropy. That’s a “double-edged sword” for financial institutions because it means the chance to both gain and lose assets, Bienfang notes. It also means a greater concentration of wealth in fewer hands, making the fight for clients even tougher.

Firms have to build strategies for dealing with wealth management and focus on the life cycle of the client, he says. That means developing a team-based system for selling and client support. Bienfang says modular broker workstations capable of performing more functions will become the hub through which advisors transact business and communicate with clients.

He also expects fewer homegrown technology solutions and more of an “à la carte menu” approach to technology, using software from third parties. Brokerage firms will simply add technology enhancements in a plug-and-play fashion, so advisors can turn things on and off as they need them.

That is well underway at Raymond James, according to Kahnert. “We search out the best third-party solutions instead of developing them internally,” he says, adding it is more efficient and cost-effective.

> Individual responsibility

Another emerging business driver is the move to make investors more responsible for their own retirement. Bienfang notes that corporations and governments are moving away from defined-benefit pension plans, in which the employee has little say about what happens to his or her pension, and shifting to defined-contribution plans, in which the employee calls the shots while assuming some risk. He says that creates opportunities for brokerages, but also translates into a greater need for brokerage firms to provide more transparent reporting and better analytics. And they will need to deliver more investor education through their Web sites.

> Investor sophistication

The last business driver is the growing sophistication of investors. They are using the Internet more and there is growing concern about privacy and online fraud. Securing client data will remain at the forefront, Bienfang says, and as firms expand products and work to make their operations more integrated, more opportunities will arise for those bent on perpetrating fraud. “Although the monetary risk directly associated with fraud is relatively low, the risk to reputation and possible regulatory action is incalculable, given the loss of revenue resulting from a publicized breach in security,” he says.

There are no shortages of IT projects, Reamey concludes: “The challenge is to make sure you don’t overload your branches with too many things. You have to stage it and have the appropriate training.” IE