Going Independent Doesn’t Mean Going it Alone Hot

Even though an advisory firm’s operations are directly tied to their client service levels, most advisors did not go independent to exercise their operational expertise. In fact, once they are up-and-running, many independent advisors often begin to miss the “comforts of home” previously provided by their broker/dealer or wirehouse (Think: relying on custodial statements that may not provide useful information like cost basis for performance).  Going independent has enough challenges without trying to rebuild an operations bureau from the ground up – and that's where portfolio management providers come into play.

Portfolio management system providers span the spectrum, from in-house software that runs on your internal network, to an outsourcing partner who dedicates technology and staff to your operations cause. It’s an important decision for the independent advisor, so here are a few tips on how to determine what's right for you:

Think Like a Client

Prioritizing your business needs around your clients can help create an environment where you are spending your time on high-payoff activities, instead of chasing around tasks that really don’t matter to your clients or prospects.

A good portfolio management solution fills gaps while keeping functionality and client reporting simple. Ask yourself these questions:

• How will it let me focus on money management and gathering assets?
• Does the system interface with my custodian(s)?
• Do I need to supply realized gain/loss reports?
• How can I best report performance to my clients?
• Will the system calculate GIPS compliant composites?
• Will it facilitate advisory fee billing and collection?
• Can it provide advisory fee payout information (sub-advisors, broker-dealer overrides, soliciting representatives, etc.)?
• Will it help me create models and trade client portfolios?
• Can it promote my firm’s image?
• Is it Internet accessible?
• What are the hardware and staffing costs involved?
• What about security and data backup?
• Does the system take care of my compliance reporting requirements?

Interfacing capabilities with your custodian(s) is crucial to easily transferring and maintaining client data. Find out how the system ties information from multiple accounts across multiple custodians. Make sure the system will be able to support your firm and clients with the reports that they need, especially if you manage assets at more than one custodian.

Data Ownership

Before signing up with any system, consider the issue of who owns and controls your client data – because depending on the vendor, it might not be you. Let’s broaden that viewpoint to include control and ownership questions:

·         Where is the data housed? Who owns the physical server?

·         Will the portfolio management system contract allow for my retention of client data ownership?

·         Does the contract explain the data de-conversion process if I choose another system in the future? 

You will want to retain true contractual ownership and control of your client data.  Some systems store your data in their proprietary format, making it expensive, or impossible to convert into a new system down the road. Ideally, you will be able to get your data files back in a usable, compatible format.

Bringing In Historical Data

Some advisors consider leaving historical data behind when they change to a new system. While some systems charge advisors out-of-pocket fees, others won’t do history conversions at all.  

So, is it worth the cost and effort to transfer historical data to the new system? It depends on any gained reporting efficiencies.  Ask your new system provider what kind of data scrubs and reports will be run on the data once converted – and who will be responsible for fixing any issues (yes, there will be issues).

It’s best to plan your conversion during a non-quarter end period. Find out from the new provider how long data conversion will take and when they anticipate starting the process. Be sure to find out what post-conversion training and help documentation is available to get you and your staff familiar with the new system.

Run Parallel at First

Plan an overlap period by running your current system along with your new system for an entire quarter to ensure accurate reports and timely service. Do not go into the conversion short-staffed - expect to dedicate extra effort and staffing during the transition.

Is Outsourcing the Right Choice?

Be sure to consider all of the costs involved in keeping portfolio management back office functions in-house: employee salary, benefits, vacation time, costs of hardware, disaster recovery, data backups, training, management, employee turnover, supplies. A $35,000 salaried employee can easily end up costing two-and-a-half times that. See a typical cost-comparison between outsourcing and running an in-house system.

Outsourcing a portfolio management system solves a lot of problems, but it is not a hands-off proposition, either. The relationship still requires your attention. Make sure a new partner allows you to outsource time-consuming functions, while still allowing you to directly edit your own data. There is nothing less efficient than relying on your outsource expert to complete menial tasks, such as updating a client address or adding a new account, and then double-checking to make sure they did it correctly. Your workflows are key, and an outsource partner should fit into the way you work – not force you to change to fit their system.

Do You Have Scale to Grow?

Try to think about the future and make sure your system allows for customizations to adapt as your practice grows and client demand changes.  Ask about the vendor’s financial and organizational stability, and where they came from. Request its organizational chart and financials. What is the firm’s five-year plan to improve its system? What is the firm’s current stand on proposed buy-out opportunities? What kind of assurance and security can they offer long-term?

No one knows better than you that taking your business independent is a big step. You will meet many challenges along the way, but hopefully even more rewards. Choosing the right portfolio management system is crucial to independent advisors; and asking the right questions up front will help lead you to a solution that fits.

As founder and president of Orion Advisor Services, Eric Clarke’s responsibilities include management of operations, IT and business strategy. For more information contact Orion at (402)496-3513 or visit Orion at www.orionadvisor.com.