Laptop on wooden table showing charts and graph Analysis Business Accounting Statistics Concept

Operating costs in the investment industry have risen inexorably in the past five years. This has hit the earnings performance of smaller investment dealers, with their narrow revenue base and limited business scale, particularly hard. But the technology investment that has driven up costs in the immediate term has created an opportunity to lower these costs over the long haul — especially if firms can take advantage of it.

Compliance costs for the new client relationship model rules, tax-reporting rules and anti-money laundering requirements has driven the unrelenting increase in operating spending. However, firms have also stepped up their spending on client-facing technology. This is in stark contrast to five years ago, when most of the technology spending was directed toward back-office systems to improve operating efficiencies and build out the client/advisor interface through online firm websites and email communications. Firms either funded these outlays directly or paid carrier firms fees to build the compliance systems and client interfaces.

The applications of client-facing technology in the retail investment business have expanded in sophistication enough to influence the strategic positioning of firms in the wealth-management space. Large and small firms alike are accelerating their spending on technology in response to client demand and competitive pressures. However, many small firms, with limited bandwidth in expertise and resources — and stretched thin in meeting regulatory compliance obligations — face the challenge of devoting sufficient resources toward technology as they strive to keep up.

The objective is to apply technology to make the transition from the conventional client/advisor relationship to a sophisticated digital interactive delivery of core wealth-management products and services on an electronic platform. Professional financial advice is the cornerstone of successful wealth management and investors recognize it as such.

The key strategic approach is to integrate technology into the client/advisor relationship in order to improve advisor productivity, facilitate the shift from administrative tasks to client focus, provide solutions in real-time, reduce transaction costs and deliver convenience to the client. This platform combines three broad components: the digitization of delivering wealth-management services; the integration of core products and services into the platform; and the strategic grouping of products and services for different client segments.

Here’s a closer look at these three components:

1. Digitization delivers to the client real-time access to advice — and the full offering of investment products and services — from computers and mobile devices. Roubini ThoughtLab and Broadridge Financial Solutions Inc., two respected names in the fintech sector, predict that advanced use of digital technology and analytics will be one of the most important criteria in selecting advisors and dealers for wealth-management services within five years.

2. Integration pulls together the full range of products and services. This includes research materials and analytic tools, as well as access to financial planning and different types of accounts — from fee-based and transactional to registered accounts and to self-directed and robo-advisor accounts. These services and types of accounts could be offered directly by the dealer or through third-party arrangements.

The platform should also include functions to facilitate client/advisor interaction and the electronic capability to bring on new clients (completion of the new client opening form) and update information on existing ones.

3. The strategic grouping of advice and accessible products and services that align with the needs of various client segments will focus services on targeted needs, especially those of high net worth (HNW) clients and the affluent mass-market client.

Advisors with smaller firms would continue to direct advice and products/services to the HNW client, complemented by access to online self-directed and robo-advice. Moreover, these small dealers could broaden client reach into the affluent mass market on cost-effective terms through digital access, providing more commoditized products such as ETFs and mutual funds, and services such as hybrid advisor/online robo-advice accounts and selective advice for structuring portfolios and periodic reviews.

In the past, it has been uneconomic to serve the affluent mass-market. This has resulted in forcing high minimum account thresholds, which have increased as costs have gone up. However, digititized and structured wealth-management platforms will enable small dealers to lower operating costs, facilitate a broader shelf offering and provide greater client convenience, improving service and extending reach. This could lead to increased revenue and provide the needed business scale to lower costs.

Electronic wealth-management platforms provide a promising architecture to improve the prospects of small and mid-sized firms — so long as they have the time to catch their breath in the midst of continuous regulatory reform and challenging business conditions to seize the opportunity.