RIA Compliance and Practice Management Blog

How to Select the Right Technology For Your New RIA Firm: Step 1 of 5

Posted by RIA in a Box

Mar 6, 2015 1:17:00 PM

When helping to register a new registered investment adviser (RIA) firm, we are often asked what technology is needed to successfully launch a new advisory firm. We generally like to approach 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.

In this blog post, we take a deeper look into the first step of the RIA technology evaluation process. This first step can at times be a bit daunting for many new investment advisers that have never before had complete freedom as it relates to technology decisions. While often a bit overwhelming, new firms can streamline the process by allowing for a bit of upfront planning discipline and structure as part of the process.

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  1. Review a firm's specific business operations to determine particular needs

We believe it makes sense to review a firm's number of employees including specific functions, type of clients, type of services offered, and regulatory requirements to begin to establish a firm-specific technology road map.

  • Staff / Employees
    • How many staff members will the firm employ?
    • What are the job functions of each staff member?
    • Does the firm have multiple offices?

Solo-advisor firms have much different technology needs than a firm with dozens of investment adviser representatives scattered across multiple offices. As soon as a 2nd staff member is added to the firm, the needs of the firm now include efficient internal communications between staff members. Similarly, when a second office is opened, it leads to more cross-office communication, supervision, and key decisions about what functions should or should not be centralized at the home office. 

Most new RIA firms start as 1-3 individuals in a single office. As such, cross-office communication may not be an immediate necessity, but we strongly encourage all advisory firms to select technology systems which can scale with additional staff members and offices. There is no better time to install new technology than when a RIA firm is first being formed. Most notably, there will be little if any legacy data to load into the system. This all quickly changes once a firm begins operating. Transitioning from one system that has been outgrown to a new system is an experience that should generally be avoided whenever possible. Thus, it's vital to always look a few years into the future when making the initial technology investment. And yes, technology should be viewed as an investment that will yield dividends in the coming years.

When talking about future scalability, it's hard to overlook the value of web or cloud-based software systems. Virtually all new RIA software is web-based which means that the software is hosted by a 3rd party in the cloud and then accessed by an investment advisory firm or its clients via the internet. With the proper security precautions in place, most professional, cloud-based solutions also offer a more secure way to store sensitive client information. Be very cautious when considering a software solution that is not cloud-based.

  • Types of clients
    • Will the firm primarily serve individual or institutional clients?
    • What is the wealth and investment sophistication of the firm's target clients?
    • Do clients have a strong desire to access real-time information online?

The vast majority of new RIA firms primarily cater to high net worth (HNW) individuals. However, other firms may focus on ultra-high net worth (UHNW) or institutional clients. In general, we see that firms catering to more institutional-like clients may require more advanced and detailed investment performance reporting capabilities. Regardless of wealth levels, there continues to be growing demand by retail clients to access investment information 24/7 via an online platform. However, depending on the size and sophistication level of a firm's clients, the firm may choose to provide different types of investment information to clients.

We generally find that new investment advisory firms that target the HNW individual client segment, do not need advanced portfolio management and reporting systems. This is largely due to the fact that we see many such firms looking to provide simplified reporting. Simplified generally means showing clients  a consolidated personal balance sheet along with some other basic information. Today, the 50 page quarterly client meeting paper presentation is being replaced by an online portal that offers clients a single page summary of a client's current vs. target asset allocation, personal balance sheet (including accounts not managed by the advisor), and basic managed portfolio performance information. 

  • Types of services offered
    • Will the firm manage portfolios in-house or via 3rd party money manager(s)?
    • Will the firm offer financial planning services to clients?
    • Would the firm like to see a client's full financial picture including accounts the firm does not manage?

While the majority of newly formed investment advisory firms will directly manage client investment portfolios, a growing minority will look to a 3rd party money manager or a turn-key asset management platform (TAMP) to assist with portfolio management. While technology should not be the primary driver of such a key business decision, it is worth noting that firms that do not directly manage client portfolios generally will have fewer technology requirements as it relates to portfolio management and rebalancing software. In addition, such advisory firms are often less dependent on the trading technology and capabilities of the firm's custodian.

On the other hand, many new firms that directly manage client portfolios are seeing the value of implementing a disciplined model portfolio system. While model portfolios can mean many different things depending on the investment style of a particular firm, in general, implementing a model system allows a firm to not only operate much more efficiently but also offer a more standardized client investment experience. Internally, such a disciplined practice allows a firm to be sufficiently served by simpler, more cost efficient portfolio management solutions. In addition, this also enables an easier installation of standard client reporting packages, update letters, and much more. We'd argue this not only leads to a more efficient and profitable business operation but also a much better client experience.

In our latest 2015 survey, 59% of RIA firms first registered in 2014 disclosed that they do offer financial planning services. This figure has remained relatively steady in recent years. In addition, our survey revealed that nearly 65% of firms with less than $50 million in assets under management (AUM) that offer financial planning services utilize a financial planning software system. We see adoption by new firms to be slightly lower than this, but in general, advisory firms that offer financial planning services will invest in purchasing one of the popular RIA financial planning software solutions. Firms that do not make such a purchase are often performing basic calculations using Microsoft Excel. However, given the figures noted above, it's important to know that less than 40% of new investment advisory firms are choosing to purchase financial planning software.

However, whether offering financial planning services or not, in tandem with providing simplified performance reporting which includes a personal balance sheet, many new RIA firms are beginning to implement automated account aggregation. Automated account aggregation allows an advisor to view a client's outside checking, savings, investment, credit card, or mortgage accounts with the balances being updated automatically on a daily basis. Such technology has evolved a long way over the last few years and now prevents an advisor from ever having possession of a client's login credentials which is a common, yet major compliance mistake to avoid. Automated account aggregation can greatly improve the client experience by offering a Mint.com-like online experience to clients while also providing an advisor with valuable insight into client assets that are currently held elsewhere.

  • Regulatory Requirements
    • Will the firm store required books and records electronically?
    • How will the firm archive all forms of correspondence and advertising?
    • Is the firm required to send billing invoices to clients?

As RIA compliance consultants, we generally find that the most organized and compliant firms are using technology to assist with investment adviser compliance requirements. We suggest that new RIA firms do not install their own client server in the office. Instead, we strongly encourage all RIA firms to utilize a secure, cloud-based document storage system. A local server in the office is not only often costly, but also common information security risk as most small advisory firms do not have the internal capabilities or budget to proper manage a server with the required security patches and back-up procedures. 

All firms also need to install a system to properly archive all client correspondence. Many of our clients utilize Smarsh to assist with their email and other archiving needs. Don't forget that social media posts also need to be reviewed and archived.

Many state-registered RIA firms are required to send separate client billing invoices in addition to the client receiving a custodian statement. Regardless, if required to or not, we always recommend that all state and SEC-registered RIA firms send separate client billing invoices as a best practice. Unfortunately, we often find that the generation and distribution of quarterly billing invoices is one of the more cumbersome operational tasks for any size investment advisory firm. Thus, we strongly encourage advisers to look for a system that helps streamline the automatic creation and electronic distribution of fee billing invoices to clients. 


Be sure to check back in a few weeks as we further discuss step two of the process of selecting the right software and technology for a new investment advisory firm

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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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