I was at a conference last week when an adviser informed me that adding technology, such as rebalancing software, was just not warranted by her practice. When I asked why, she said hers was a "lifestyle practice" with only 20 clients.
I pondered that statement for days. What exactly is a lifestyle practice? And why is a lifestyle practice and technology mutually exclusive? My take on a lifestyle practice is a practice that limits the number of clients to enable more personalized service to each, while allowing the adviser to remain solo — and keep working hours reasonable. I can understand the desire to earn a reasonable living minus the stress and time commitment required with a large RIA practice.
(More: Technology can help advisers manage mutual fund capital gains taxes)
But is the shunning of technology necessary or appropriate? Let's assume an adviser has 20 clients and no automation. Client-related tasks could mount up to about 1,200 hours per year. Adding time for administration, compliance and continuing education, let's say this lifestyle practice would require 1,500 hours of work per year. The 1,200 hours of client work per year could consist of 60 hours per client broken down as follows:
• Rebalancing, cash needs/investing trades, tax loss harvesting and capital gain distribution avoidance: 8 times per year times, 1 hour each = 8 hours
• Financial plan update: 1 time per year, 24 hours = 24 hours
• Quarterly reporting and billing: 4 times per year, 2 hours each = 8 hours
• Meetings & consultations, including preparation time: 4 times per year, 4 hours each = 16 hours
• Special projects such as RMDs, charitable planning, gifting, etc.: 4 hours per year = 4 hours
• Total hours per year per client = 60 hours
• Total hours per year for 20 clients = 1,200 hours
Assuming a solo practice, $1.5 million average AUM per client and 0.80% management fee, the adviser could earn gross revenues of about $240,000 per year.
This sounds like an OK deal except for two important points: 1) Over half of the client work consists of repetitive, error-prone, time-consuming tasks, and 2) Dual goals of limiting hours and providing high quality service mean capacity to take on new clients is limited.
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Because RIAs truly benefit their clients, is it fair to leave prospective clients to fend for themselves or, worse, go to a stockbroker? Wouldn't it better serve the public good — and make your work more enjoyable — if additional clients could be taken on with less (mundane) work?
Adding a portfolio accounting solution, automated rebalancing software and financial planning software could cost $10,000 to $20,000 per year. It would also eliminate at least half of the adviser's client work time. If the adviser in this example would be willing to take on just five more clients with an average AUM of $1.5 million, revenues would increase by $60,000. The net working hours would decrease by approximately 450 hours per year. The bottom line is that, in this example, automation could allow the adviser to net $40,000 more per year while working 450 hours less.
So, why shouldn't lifestyle practices take on technology? In my opinion, technology can benefit any size firm, including lifestyle practices.
Sheryl Rowling is the chief executive of Total Rebalance Expert and principal at Rowling & Associates. She considers herself a non-techie user of technology.
