All Wrapped Up

As a broker at the largest wirehouse on Wall Street, life was fairly easy. My only stress and my single focus was to make enough calls daily to open more new accounts so as to keep bringing in more assets. Sure, I had to review accounts, meet with clients, and manage portfolios, but the operational headaches of cost basis maintenance, account reconciliation, fee billing, account administration, statement generation, and other paperwork were handled by an operations center somewhere on the East Coast. Statements went out, records were kept, paperwork was processed, and compliance was administered, all without any involvement from me.

So when I left the big firm in 1998 to become an independent rep, I was under the false impression that I could handle it all as my own branch office and OSJ. I’d just have to handle a bit more paperwork, send it into the home office, and then sell, sell, sell! Oh, I’d also have to manage money.

However, I was in for a rude awakening. I quickly realized that there was much more to the advising business than selling. I had to worry about the cost basis of my clients’ investments; monitor their portfolio performance and statement generation; choose financial planning software; and find accurate and cost-effective mutual fund and stock research. Yes, there were solutions to those worries, but they were available only piecemeal and at much greater cost than I had imagined. At the wirehouse, it was all provided for me, and now I, “Joe Entrepreneur,” had to deal with everything, including rent, phone bills, and copier toner. I simply wasn’t prepared.

So I did only what was absolutely necessary to run my office and kept costs to the bare minimum. I worked 15-hour days primarily to handle the paperwork and operational issues. For the first 12 or so months, business was great, the markets were at my back, and I was opening new accounts, bringing in new assets. But then it began to change. At then end of my first calendar year in business, the calls from accountants and clients came in asking for cost basis information, fee statements, and everything else.

At the same time, the markets began their horrific slide and managing money became much more complex than simply buying any tech stock. Asset allocation became paramount, and rebalancing and proactive money management were necessary. I had neither the time nor the resources to handle the new business, the changing business, the increasing number of client inquiries. I had the investment advisory expertise but I didn’t have the tools, and more important, the time to properly run my practice.

As 2000 slumped along, the operational and administrative headaches continued to mount and I was overwhelmed by my practice. I hired a part-time retired schoolteacher to assist with filing and paperwork, but she had no experience in the financial industry. She cleaned up my filing mess, but that was all she could do. I couldn’t afford to hire a full-time registered sales assistant, nor did I wish to bring on an employee, add him to my retirement plan, and deal with other personnel issues. Also, I’d need more space, another phone … there were so many other costs that it would have been prohibitive. Again, though, the bottom line was that I didn’t have time to think about it.

A Merger Turns Sour

In the midst of this crisis, you can imagine what happened to the investment side of my business–managing money–which is what my clients were paying me to do. It wasn’t as though their performance suffered any more than others, but I simply didn’t have the time or resources to diligently review, manage, and make proactive changes to accounts. In addition to lack of time, an even larger problem was the fact that nearly all of my accounts were different. Since I didn’t possess any way to oversee all the accounts in a common format, I couldn’t deliver my best ideas to all my clients, and many grew out of sync with their target allocations. I didn’t know what to do. The account-by-account trading was a nightmare, something I avoided whenever possible. Clients were being traded on different days, at different prices, with different securities, so disparity was the norm, not the exception.

I knew I needed help. I labored over how best to achieve scalability and efficiency, but could see only two options. I could hire a staff and purchase all the tools necessary to run my entire investing business in-house, or merge with an existing RIA that already had a support team. I wound up choosing the second option. I had been working with a money manager down the street, having them sub-advise some of my equity portfolios. We had a very good working relationship; I was their largest broker in terms of assets, and they seemed to be a great group of people. It was a logical fit.

So we set about merging our businesses. My new partner was predominantly an institutional firm serving nonprofits and pension plans while my practice focused on individuals, so it appeared to be a complementary merger. The RIA ran Advent, had an experienced administrative assistant, a research team, and a great office location. I thought I had solved my dilemma.

All went well at the beginning. We moved my clients’ assets to Schwab, and built a NTF mutual fund asset allocation program to serve my clients. It seemed perfect. However, as time went on, it became evident that our business cultures were not as complementary as I first thought, and our business objectives were drastically different. I didn’t conduct adequate due diligence, and frankly, my desire to join this RIA was made out of desperation for a back-office solution, not because I was looking to merge. Thus, after a year, and lots of legal fees, we split up; I took my clients and was back where I started–on my own.

At that point, I was so frustrated that I came very close to leaving the business altogether. I wondered whether selling my practice and pursuing another career would be the easiest thing to do, rather than being confronted with what appeared to be an overwhelming challenge to run my practice efficiently and profitably.

However, after reviewing my alternatives–merge, sell, or go back to my old model–and seeking the opinions of my clients and family, I decided to make a go of it. I realized that, despite the operational and administrative headaches, I did in fact enjoy what I did for a living. More important, my clients, the people I served, made it clear that they didn’t want me to leave the business: they told me they needed me. With that part of the question answered, I had to figure out how I was going to effectively manage all the moving parts of my practice. It was at about that same time I was introduced to BridgePortfolio and the concept of outsourcing.

The Outsourcing Solution

Up to this point, outsourcing was a foreign term to me; one I ascribed to other industries involving cheap labor in Mexico or China. What did outsourcing have to do with a small Midwestern advisor? As I learned more, I realized that I had been unknowingly reaping the benefits of outsourcing for many years. Like most advisors, I had been outsourcing investment research and management duties via mutual funds and money managers. Further, well before my failed “marriage” to the RIA, I had outsourced stock picking on some accounts to the manager down the street. In fact, outsourcing had been a part of my practice for over 10 years.

Further, the retired schoolteacher I had hired, along with some college students I had used as temps here and there, were all paid as independent contractors, a form of outsourcing. I used a bookkeeper to keep my books and records, a CPA to file my taxes, and an attorney to write up my contracts and handle compliance. Further, I hired outside consultants to set up my computer network and to write and print my marketing pieces. These were all forms of outsourcing.

But the biggest headaches associated with efficiently running my practice were the things I couldn’t imagine outsourcing: portfolio accounting, reporting, fee calculation and billing, trading, account administration, and interaction with my custodian. These were my biggest obstacles to growth and profitability since they consumed so much personal time and energy.