Investment Policy Statements: The Technology Return on Investment (ROI) for Financial Advisors

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Executive Summary

The financial services industry is undergoing rapid change due to recent financial crises on Wall Street and the impacts of a prolonged recession.  Market volatility has increased, creating uncertainty and angst in investors’ minds.  The demand for transparency has increased, as have the expectations for better “prudent practices.”  As a result, there has been a renewed focus for investment planning by financial advisors and the use of the time-tested approach of Investment Policy Statements (IPS).

Considered a “best practice” in modern wealth management, documenting advisor-client agreements in an IPS provides a systematic discipline for decision-making, bringing transparency, clarity and shared understanding to the advisor-investor relationship, helping to build an increased level of trust.

Many financial advisors are using word processing software solutions combined with manual processes to perform the related tasks of creating, updating and maintaining IPSs and the resulting inefficiencies cause higher costs and lack of controls, which result in declining profitability.

Industry experts all agree that the best solution is to adopt technology to increase efficiency, streamline operations and enable rapid response to market changes.  New advances and innovations in technology specifically designed for financial advisors to provide web-based investment planning tools for creating Investment Policy Statements that allow advisors to meet these challenges head on and provide a substantial return on investment (ROI) is now available.

“If we tried to create our own Word document, the problem we see is that it would be extremely difficult to maintain consistency, what with re-entering and re-casting the allocations for hundreds of clients.  By using the templates in IPS AdvisorPro® we know that we are achieving a big time savings and ROI.”

David Strege, CFP®, CFA®, Co-Founder and Senior Wealth Coach, Syverson Strege & Company



Download a PDF version of this White Paper here.

By having an online platform that is flexible, dynamic and easy to use, advisory firms can lower the costs arising from the writing of IPSs by tens of thousands of dollars on an annual basis.  The bottom line result is that not only do advisors realize substantial cost savings, they are also empowered with a very robust investment planning capability that frees them up to pursue growth opportunities and reallocate staff resources to revenue generating and client-facing activities.

Table 1.0 – Annual Savings from Web-Based Investment Planning System vs. Traditional Word Processing Systems

Size of Firm (# of clients)

50

100

250

Word Processing Solution

$22,500

$45,000

$112,500

Online Solution

$6,200

$12,400

$31,000

Savings

$16,300

$32,600

$81,500

Return On Investment Opportunities

An in-depth study into the operational costs associated with the investment planning process for creating, updating and maintaining Investment Policy Statements (IPS) has revealed opportunities for cost savings and a significant ROI for technology solutions.  These include the operational tasks for:

  • IPS Creation
  • IPS Client Updates
  • IPS Firm Updates

“From just a time stand point, it typically only takes about 1 hour to complete a detailed and comprehensive IPS with IPS AdvisorPro® vs. the 5 or 6 hours it normally would take if we did it on our own and it wouldn’t be nearly as comprehensive.”

Eric Golberg, CFP®, Vice President of Private Wealth Services, Bellatore, LLC

IPS Creation

The typical process for creating an IPS for a client involves multiple manual steps using word processing software, such as Microsoft Word.  These include:

  • Filling out client related data intake questionnaires
  • Organizing client data for IPS creation
  • Entering in client data and recommendations
  • Finding and inserting the appropriate Asset Allocation models
  • Selecting benchmarks
  • Customizing/Revising the IPS based on client requests
  • Proof reading the entire document to ensure accuracies and fixing typos
  • Compliance review
  • Save / print to client files

When IPSs are created with word processing software, this manual process can take several hours to complete, creating many opportunities for errors and inconsistencies across multiple advisors in the firm or from one client to the next.

Other problems arising from using word processing software to create an Investment Policy Statement include the potential to skip over asking all questions pertinent to the IPS as well as the fact that word processing templates can easily and are often mistakenly over-written, resulting in the original intended wording lost forever.  Other areas of concern are that there are no “checkpoints” in a word processing template to make sure that each place in the document that needs to be examined are addressed.  As a result, some areas can be overlooked and the final document may contain sections that are not appropriate or even places where the wrong clients’ names or information are used.  Because of these potential areas for mistakes, each word-processed IPS must be carefully reviewed, increasing the total amount of time for the overall process.

Contrast this software / manual process with an online investment planning tool with consistent templates and information that is auto-populated into the document or is just a click away, as well as being stored in a secure system, and many of these tasks and staff time are reduced dramatically, with a much higher accuracy rate.  Incorporating compliance-approved language and disclosure information, pre-programmed into the system, shortens and streamlines the compliance review process and ensures consistency across the firm.

For many advisory firms, creating IPSs can only be done by the advisor since many of the tasks are customized to the client situation and are very difficult to delegate to lower cost employees.  At a conservative rate of $75 per hour[1], the cost savings for firms is substantial, ranging from $6,000 to upwards of $30,000 per year, depending on the size of the firm (Table 2.0).

Table 2.0 – IPS Creation Costs

Size of Firm (# of clients)

50

100

250

Word Processing Solution

$9,700

$19,400

$48,500

Online Solution

$3,550

$7,100

$17,750

Savings

$6,150

$12,300

$30,750

[1] Source:  Industry compensation benchmarking surveys reflect advisor compensation is ~$150,000 per year, divided by a 2000 hour work year equals $75 per hour.

IPS Client Updates

Once a client’s Investment Policy Statement has been created, it should be regularly updated as part of the quarterly or annual review process.  Clients’ needs, situations, account values and objectives change frequently, requiring firms to periodically update their financial and investment planning documents.

As part of this process, there are again many manual steps required for firms using word processing software.  These include:

  • Updating client contact data
  • Updating account values
  • Updating description of client circumstances
  • Updating Investment objectives
  • Updating asset allocation
  • Updating investment constraints/restrictions
  • Proof reading the entire document to ensure accuracies and fixing typos
  • Compliance review
  • Save / print to client files

Contrast this software / manual process with an online investment planning tool with the ability to access the stored IPS from anywhere and update with information that is just a click away or can be downloaded from other programs such as CRM and financial planning tools, and many of these tasks and staff time are reduced dramatically, with a much higher accuracy rate.

At a conservative rate of $75 per hour, the cost savings for firms is substantial, ranging from $4,000 to upwards of $20,000 per year depending on the size of the firm (Table 3.0).

Table 3.0 – IPS Client Update Costs

Size of Firm (# of clients)

50

100

250

Word Processing Solution

$6,250

$12,500

$31,250

Online Solution

$2,000

$4,000

$10,000

Savings

$4,250

$8,500

$21,250

“The standard process and the flexible templates in IPS AdvisorPro® allow us to create one format and approach for generating consistent documents from each advisor for every client with the appropriate disclosure language and our pre-determined asset allocation models.  Without that, our compliance and supervisory requirements would grow exponentially if we had everyone using their own approach, wording and content.”

Jim Arnold, Senior Vice President and Investment Group Manager, Monroe Bank and Trust

IPS Firm Updates

In these current volatile markets, investment strategies, asset classes and overall asset allocation models are constantly being reviewed, changed and implemented as part of the firm’s approach to managing client portfolios.  These firm-level changes then need to be manually applied to each and every client situation since they cannot be globally broadcast through word processing software to include the corresponding updates to client investment and financial planning documents.  These required manual steps include:

  • Modifying asset classes to be included in the client’s asset allocation model
  • Updating the percentages of each included asset class within each asset allocation model
  • Selecting the appropriate asset allocation model for each IPS
  • Updating the various descriptions for the firm’s philosophy and approach to managing portfolios

Contrast this software / manual process with an online investment planning tool with the ability to simply use a “check box” approach to modify asset allocation models and percentages along with the ability to change descriptions in one place that are then automatically, globally carried through to all client IPSs, and many of these tasks and staff time are reduced dramatically, with a much higher accuracy rate.  This ability to quickly update client documents based on changes in the investment approach provides firms a great deal of flexibility to respond to the market environment, be consistent throughout the firm as the changes are implemented and provide a much higher level of service.

At a conservative rate of $75 per hour, the percentage cost reduction is substantial (90%) as well as the overall dollar costs, ranging from nearly $6,000 to $30,000 per year depending on the size of the firm (Table 4.0).

Table 4.0 – IPS Firm Update Costs

Size of Firm (# of clients)

50

100

250

Software Solution

$6,550

$13,100

$32,750

Online Solution

$650

$1,300

$3,250

Savings

$5,900

$11,800

$29,500

“IPS AdvisorPro® with its flexible technology allows us to truly customize the IPS by importing our detailed, complex and innovative asset classification methodology into the IPS.   Additionally, through its online platform, we are able to provide a consistent approach across our 150 employees and 7 offices nationwide, all the while controlling the process.”

Steve Braverman, President, Harris myCFO

Conclusion

While every advisory business is different and actual dollar and time savings will vary from firm to firm, it is clear that a web-based, secure, and flexible investment planning tool for creating IPSs can deliver a significant return on investment as compared to writing and updating an equal number of Investment Policy Statements using word processing software.

Financial advisors owe it to their clients, their firms, their staff and themselves to explore how new technology solutions can streamline their back-office, provide scalability, enhance service to their clients and ultimately improve profits and the ability to grow.

While many advisory firms have enjoyed success with their current approaches, in today’s volatile markets, leading advisory firms are taking the initiative to adopt new technology to stay ahead of the curve.  The opportunity for success has never been greater: higher revenues, increased efficiency, lower business risk, all you have to do is take the easy steps necessary to make them a reality for your firm.

Appendix – Methodology

Time in Minutes for Various Tasks Associated with Creating, Updating and Storing IPS per client

Word Processing / Manual Process

Online Investment Planning Tool

Time and $ Savings per Client @ $75/hr*

IPS Creation

155 minutes

57 minutes

98 minutes

$123

Fill out questionnaire / organize client data

15

15

0

Find and insert Asset Allocation models

15

4

11

Select Benchmarks

15

0

15

Customize IPS for specific client requests

30

15

15

Enter client recommendations and proof read entire document

60

15

45

Compliance review

20

5

15

Run IPS and save to system

0

3

-3

IPS Client Update

100 minutes

32 minutes

68 minutes

$85

Update client contact data

15

4

11

Update account values

10

3

7

Update description of client circumstances

20

10

10

Update investment objectives

10

2

8

Update asset allocation

15

2

13

Update investment constraints

10

3

8

Compliance review

20

5

15

Run IPS and save to system

0

3

-3

IPS Firm Update

105 minutes

10 minutes

95 minutes

$119

Modify asset classes

30

5

25

Update each model with new asset class percentage

30

5

25

Enter appropriate model in each IPS

15

0

15

Update description for how firm manages money

30

0

30

Totals

360 minutes

99 minutes

261 minutes

$326

*Hourly cost is determined by using industry compensation benchmarking studies for advisors, which is ~$150,000 per year divided by a 2000-hour work year, which equates to $75 per hour.

About IPS AdvisorPro®

Created by financial advisors for financial advisors, IPS AdvisorPro® is designed to work with all types of wealth management professionals and their practices.  IPS AdvisorPro® offers a flexible solution to creating and managing Investment Policy Statements that are easy to use through an encrypted, secure web-based environment.  With over 1,000 users and 17,000 IPSs created, IPS AdvisorPro® is the industry’s leading technology solution.  IPS AdvisorPro® was named in 2006 by Morningstar as the “Software of the Year” and was a CPA Wealth Provider “Financial Planning Awards Winner” in 2009.  For more information, please visit www.IPSAdvisorPro.com.

Click here to read the InvestmentNews review of this white paper (by Davis Janowski, Technology Reporter, 7-31-09).


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