As educational editor of the 2013 TechLeaders Conference held on March 13–15 in Irving, Texas, Beacon Strategies LLC contributed to the conference's goal of developing thought leadership for broker-dealers of all sizes.
To that end, we designed and conducted the 2013 TechLeaders Survey to evaluate the current state of broker-dealers' initiatives, priorities and relationships with their solution providers. A questionnaire was sent to senior executives at a majority of U.S. broker-dealers with 25 or more investment professionals. It included questions on technology preferences and vendors, social media usage and trends, completed or planned technology initiatives, and technology budget and staff.
The following summarizes the results of the 2013 survey based on an overall response rate of more than 80% of the major independent and insurance broker-dealers in the United States. Through this annual survey, Beacon and our clients are able to monitor significant trends in the industry, as well as important changes in priorities, vendor relationships and resource allocations over time.
The Gathering Cloud
In this year's survey data, we see fundamental changes with long-range implications. Since last year, the broker-dealer mainstream has moved to embrace third-party solution providers in general. Specifically, momentum has shifted markedly toward third-party providers that are leveraging cloud and software-as-a-service (SaaS) capabilities. This trend has made build-your-own solutions and reliance on clearing firms relatively less attractive, as shown in the table below.
The momentum of cloud/SaaS is sucking the oxygen out of the room. All three of the other models shown above lost mindshare, and their losses contributed about equally to cloud/SaaS's gain of 34%. Under cost and competitive pressures, broker-dealer executives know they must keep pace in the tech race, but they do not wish to become tech development shops. Also, they are starting to see clearing firm solutions as lagging versus the leading third-party vendors in several categories. We believe the popularity of mobile devices and cloud-based apps (e.g., Dropbox) has accelerated acceptance of professional-level SaaS solutions.
Broker-dealers tell us they are turning to the cloud/SaaS model for three reasons. First, it is the fastest and most economical way to deploy the services they offer and stay current. Second, it can support financial advisors who work and engage their clients in multiple locations (e.g., office, home, client site) and who have increasingly adopted mobile devices. Finally, it minimizes the requirements for higher fixed-cost internal technology resources, allowing firms to focus management and financial resources on their core competencies.
Broker-dealers also say that cloud/SaaS solutions are becoming easier to integrate with the software packages they currently use or are considering using, simplifying the conversion and providing greater data portability than in the past.
A Foundation Built on Solid Data
Another strong current running through this year's survey is the continued emphasis on data as a strategic asset and the adoption of data mart/warehouse-type solutions. As illustrated in the graph below, there has been an increase of almost one-fifth of all survey participants who have adopted such solutions since last year's survey.
We often refer to the data mart/warehouse as a "golden source of data" and a "single version of truth." We think this data management strategy establishes the critical foundation necessary for today's broker-dealers to successfully deploy their business application solutions. This foundation, in turn, supports operational efficiencies, improves data integration capabilities, underpins the value of the applications, and increases the returns on investment for software purchases or development.
This year's survey indicates that the message is being heard and is motivating decisions and execution strategies. With a golden source of data to draw upon, broker-dealers can be more confident that applications, such as compliance surveillance systems, will deliver comprehensive, consistent and accurate results.
Social Media Moves Into the Field
In 2012, social media flew onto the industry's radar screen in a big way. In our previous survey, 35% of firms said they planned to permit social media usage over the next 12 months. Therefore, it was no surprise to see social media deployments proliferate this year. Two-thirds of broker-dealers (67%) said they are either in the process of deploying social media in their business or already have solutions deployed, compared to just 55% last year. (See Figure 3, below.)
2012 laid the groundwork for broker-dealer adoption of social media, with initiatives focused on the selection and implementation of tools for maintenance, archiving and surveillance. In 2013, firms are focusing resources on moving social media usage deeper into the field with training, content libraries and integration with contact management tools. Advisors who are in the vanguard of social media usage are producing success stories that are starting to "go viral" in terms of influence and impact. The fear factor about using social media is quickly disappearing.
Technology Fees: Perception of Value
As the dependence on technology pervades broker-dealer cultures, 63% of firms now report that they charge advisors administration, affiliation or technology fees—up from 56% last year. Several firms have reported that their average monthly fees are trending higher to cover increased tech spending in terms of technology acquisition and ongoing support.
We believe barriers to charging these fees have fallen, mainly because advisors perceive rising value in the tech-related services. In most cases, it is the advisors who are demanding greater technology support rather than being forced to adopt technology. Although many of the initial technology mandates were based upon the need to create a consistent infrastructure, particularly for compliance, the standardization and automation has dramatically increased advisor productivity and enhances their ability to manage their practices. We think the fees have become essential in helping broker-dealers keep pace with these rising technology demands during a period of margin squeeze in the industry. We would not be surprised to see fee adoption rates continuing to increase until leveling off at about 90% of all firms. Eventually, firms that don't charge these fees may be at a competitive disadvantage through their inability to fund and support enhanced solutions for themselves and their advisors.
Top Five Tech Challenges
In 2012, our survey identified the top four tech challenges as straight-through processing (mentioned by 75% as "somewhat" or "most" challenging); investment professional data aggregation (69%); enterprise compliance surveillance (68%); and data management (61%). This year's top five challenges are summarized in the table below.
