RIA Compliance and Practice Management Blog

How to Select Technology For A New RIA Firm: Step 3 (Build vs. Buy)

Posted by RIA in a Box

Mar 19, 2015 11:00:00 AM

When helping an advisor launch a new registered investment adviser (RIA) firm, we are often asked what technology is needed for a new advisory firm. We like to address this question with a 5 step process: 1) review a firm's specific business operations to determine particular needs, 2) establish an initial monthly technology budget, 3) determine the firm's desire to "build" vs. "buy" 4) decide on general small business applications and other infrastructure, and 5) select specific RIA technology and software solutions.

Following up on last week's blog post on step 2 of the process on how to set a monthly technology budget for a new RIA firm, we now dive into step 3 of the RIA technology evaluation process: deciding whether to "build" or "buy" investment adviser technology. By "build", we do not mean to literally go out and build and develop a new software application, but rather to build a customized technology suite by integrating a number of different RIA-industry software solutions. By "buy", we mean selecting a pre-built RIA technology platform to utilize as the hub of the firm's client service and internal operations needs.

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When making the buy vs. build decision, it's also important to note that when exploring the "build" option not all software "integrations" are created equal. Unfortunately, there is no standard integration. In general, RIA technology integrations fall into one of these three broad categories:

  1. Single sign-on (SSO): The ability for a user to login to multiple software solutions with a single login credential. This is the most simplest of integrations and allows a user to not have to login separately to multiple systems.
  2. One-way integration: Data is pushed from one system to another system but only in one direction.
  3. Two-way integration: Data is pushed and received from one system to another in both directions. 

Thus, when a vendor says that the software is integrated with another solution, it's crucial to probe a bit further and better understand the depth of the integration. However, even if there is a two-way integration in place, it's important to remember that whenever data is being housed by two separate systems with independent data infrastructures, no integration is ever going to be perfect so it's vital to have the proper expectations.

Regardless of whether a firm makes the buy or build decision, we cannot emphasize enough how important it is for any size RIA firm to view technology as an investment rather than as a cost. Every year, our annual investment adviser technology survey illustrates that investment advisory firms that are aggressively adopting technology continue to grow at a faster pace than their peers that have not made a technology investment. We consider aggressive adopters of technology to be any firm that is utilizing three or more key RIA technology components (customer relationship management (CRM) software, portfolio management and reporting (PMR) software, financial planning software, etc.).

According to our survey, RIA firms that are aggressive adopters of technology grew assets under management (AUM) by 12.71% in 2014 compared to an average AUM growth of 3.25% for firms that do not utilize any industry technology. In addition, only 11.69% of aggressive technology adopters had a decline in AUM in 2014 compared to 23.98% of firms that do not adopt any investment adviser technology.

As shown in the table below, we believe that most investment advisory firms should not attempt to build their own integrated RIA technology suite until they reach at least $100 million in AUM:

RIA technology integration vs. platform

Investment advisory firms are notorious for not properly fully factoring in the opportunity cost when making the decision to attempt to integrate their own technology system. Time is a precious commodity and time is especially a limited source to the principal of a smaller RIA firm who is constantly wearing multiple hats ranging from Chief Executive Officer (CEO) to Chief Investment Officer (CIO) to Chief Compliance Officer (CCO). It generally does not make sense for that same principal to also fill the Chief Technology Officer (CTO) role. Any technology task that takes time away from business development and relationship management responsibilities with prospective and existing clients is very expensive time. Furthermore, regardless of time, it's quite difficult for a principal of an RIA firm to stay on top of the latest industry technology trends and innovations in order to avoid costly mistakes that later need to be rectified.

On the other hand, larger investment advisory firms that start reaching $100-300 million in AUM may at times be better served by hiring a dedicated CTO or technology consultant to help construct, customize, and manage an integrated RIA technology system. As discussed in our RIA Systems and Operatonal Best Practices white paper and as depicted in the sample diagram below, we strongly encourage all adviory firms to focus on making the CRM system the hub of a firm's technology platform: 


More so than ever before, there is a lot of great technology available to RIA firms. However, the lines between different categories have become a bit blurred and sorting through all the different options can be bit overwhelming. As such, we are seeing an increasing number of RIA firms choose a platform as an attractive alternative to piecing together their own integrated technology system. In addition to often gaining access to better technology at a more affordable price, some of the other benefits of utilizing a single platform solution include:

  1. There are tremendous efficiency gains when all data is stored in one system. No more data uploads or manual entries are needed. Real-time reports are always instantly available.
  2. Better technology adoption since there is only one system to be trained on and less confusion as to where to find what information in which system.
  3. Ability to have a more proactive compliance monitoring system to help prevent potential registration and filing issues.

In our next blog post, we will further discuss how to choose specific general small business software which is step 4 of our 5 step process when selecting RIA technology. In particular, we will note some specific vendors that we've seen investment advisers have success utilizing in their practices.

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Topics: RIA Operations, RIA Compliance, RIA Technology

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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