Three Is NOT a Crowd in the Cloud: The 2013 TechLeaders Survey

By Chip Kispert, Marshall Levin, Larry Paley, Peter Montoya

July 01, 2013 at 08:00 PM

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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.

When we focus only on the most challenging areas, the clear leaders are data management (50%), enterprise compliance surveillance (45%) and data aggregation (43%). However, other areas are creeping onto the list. They include business intelligence computing (36%), mobile/tablet devices (32%) and cybersecurity (26%).

Despite the trend toward cloud-based solutions and increased use of social media, only 14% and 17% of respondents, respectively, listed these as most challenging. This suggests that vendors have been mostly successful in reducing the challenges to implementation in these areas. This success in implementation has led to the emerging problems in cybersecurity and mobile computing. Now that the data warehouse/data mart solutions are starting to produce actionable data, business intelligence is becoming an issue.

[To learn more about broker-dealers' preferred technology providers, click here.]

Allocating Resources

To which tech areas are broker-dealers now allocating their people, time and money? Where are they likely to allocate these resources over the next two years?

In 26 areas, the survey asked participants whether they currently have capabilities already deployed, are in the process of implementation or have specified requirements for future development. This mirrors a basic project development pipeline—i.e., in firms where we see requirements specified, we often see implementations-in-process a year or two later and deployments in place about two to three years later.

One remarkable finding shows how pervasive technology has become in today's broker-dealer industry. In all 26 areas surveyed, more than 80% of broker-dealers said they had projects at some stage in the pipeline, including deployment. (For full results, see the Appendix on AdvisorOne.com.)

To stay successful and competitive, modern broker-dealers must support a broad set of technology solutions, when less than a decade ago many of them relied on a single compensation system with backfill from their clearing firm as their technology platform. Today's firm needs to juggle many tech balls at once, with making smart allocations of people, time and money amongst them. This juggling act became the greatest factor in adopting third-party solutions since virtually no firm has the resources and expertise to successfully develop and support the necessary technology portfolio.

In five areas, 99% of broker-dealers said they had projects somewhere in the pipeline, as shown in Figure 5 (below, left).

These areas have become the price of admission for modern broker-dealers. The vast majority of firms either have them deployed or in process.

While already-deployed tech solutions require resources for maintenance and upgrading, the real heavy lifting for resource-allocation purposes arises during the in-process implementation phase. For example, the survey showed that 65% of firms were in the process of implementing mobile/tablet device and bring-your-own-device support, while 64% were implementing service model support systems. Therefore, these were the heavy-lifts for the industry at that point in time.

If we want to see where the action will be over the next two years, we then need to look at areas where large numbers of firms are now establishing business and system requirements, as shown in the table below.

Financial planning software is one of the most mature third-party categories, with three firms now having more than 40% market share. However, the data suggests we may be heading into next-generation planning software and systems, which creates opportunities for new vendors to rise and existing leaders to reshuffle share. This is especially noteworthy in the context of providing support for mobile devices as well as leveraging data through better integration with data warehouses/marts. Annuity due diligence, marketing services and compensation management are additional growth categories in which third-party vendors have not yet penetrated a large number of broker-dealers.

Comparing Top Tech Challenges with Current Resource Allocations

Earlier in the survey, we listed five areas that at least 78% of survey respondents listed as either "somewhat" or "most" challenging. It's useful to compare these areas with those we listed above as the top five for current resource allocations, as shown in the table below.

Although only one area, enterprise compliance surveillance, appears on both lists we believe there is consistency in the story the results are telling. The complexity of the top technology challenges often require multiple phases that rely on different solutions to eventually incorporate virtually all the processes and activities of a broker-dealer. For example, solving for current client data protection challenges may require the services offered by reliable third-party vendors in cybersecurity, mobile/tablet/BYOD and cloud computing. Executives aren't losing much sleep worrying about how or where they are allocating resources; the allocations are the way they are addressing the challenge.

Beacon's annual TechLeader surveys help to document current trends and year-to-year changes in broker-dealers' adoption of technology. This year's survey shows one inescapable fact: Broker-dealers (as well as their advisors and client-investors) are becoming increasingly dependent on ever more diverse technologies, categories and solution partners. At the same time, reliance on third-party providers is growing, and more broker-dealers perceive third-party solutions as the key to achieving simplicity, economy and speed-to-market. This was a year of dramatic upswing for cloud and SaaS third-party providers. In fact, we can confidently project that for several years to come: "Three is not a crowd in the cloud."

The arsenal of technologies that a modern broker-dealer needs to stay competitive is becoming well-defined. Simultaneously, fewer firms have the in-house resources or diverse tech knowledge base to rely on build-your-own systems and solutions. Although some categories of third-party solutions may appear to be mature, today's environment is ripe for next-generation solutions that offer potential for big productivity gains and long-term cost savings.

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