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All Wrapped Up

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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.

At the time, I thought that the only means available to outsource all the administration, paperwork, trading, and billing was to move all my accounts under the umbrella of a TAMP (turnkey asset management program). But that meant giving up control over how the assets were managed and where the assets were custodied, not to mention increasing fees to the client. The TAMPs’ tools were great, but I wanted more input into the investment management process, and I wanted to keep my client fees reasonable. Most of my clients’ accounts averaged around $500,000, so the available TAMPs were not necessarily the most appropriate options.

Mutual fund wrap programs were also a consideration, but again, the fees were too high, my choice of custodians was limited, and I didn’t wish to have clients on multiple different platforms if not all were using third-party mangers or mutual fund wrap programs. I wanted a single place that all my clients could keep their assets, and receive the type of investments that were most appropriate for each at a reasonable price. I didn’t think that was too much to ask, but apparently it was (and for the most part, still is).

Bridging the Gap

So I had two choices. Buy all the software and hire the staff to do it in-house, or go with a TAMP, where I would have limited control over pricing, less control over the investment management process, and no control whatsoever over where my clients held their assets. If I wanted to use a TAMP for some of my practice and self-manage others, I was out of luck. I needed two different platforms, and still needed to maintain staff. There had to be a better way.

Fortunately for me, I was then introduced to Inc., a company based in Chicago that could provide a way to handle my smaller accounts as a private-labeled TAMP/separately managed account platform. BridgePortfolio was founded in 2000 by Chad Meyer, a successful entrepreneur and University of Chicago MBA student, to help investment advisors profitably manage smaller accounts using Web-based technology.

Today, BridgePortfolio works with over 40 advisors, from startups to those managing billions of dollars. The BridgePortfolio private label approach doesn’t mean simply slapping my logo on the company’s platform, but customizes it to my specifications and needs. BridgePortfolio provided the benefits of a TAMP: a Web presence (with my own URL, not a minisite off its site); processed account opening paperwork; acted as liaison with the custodian; handled fee billing and performance reporting; and provided some marketing support. What separated BridgePortfolio from other platforms I considered was that I remained in control of the investment selection, allocating and managing the accounts to my specifications. Further, I retained my existing relationship with my custodian of choice; I was not simply entering into a selling agreement with BridgePortfolio and using its platform. Had I known about BridgePortfolio earlier, I never would have needed to merge with anyone, nor build a staff; I could have simply outsourced all the operations and administrative work to them.

I had heard of other outsourcing solutions, under which you could retain multiple different service providers or virtual work partners, but I didn’t want to have to deal with three or four or even five different entities. I wanted to have one place that could handle most of my needs, and where they knew me and my business intimately.

BridgePortfolio acts as my administrative, operations, and trading staff. Its system downloads from and interacts with my custodians on a daily basis. I access its suite of tools via my own Web site; I rarely have to log on to the custodian’s site. As an example of how the company’s system works, here’s how I handle a new account. I go to my Web site to enter all the new account data that auto-populates custodial forms, my advisory agreement, and customized proposals.

After the forms have been printed and signed, I mail the applications to BridgePortfolio for review. It sends those forms to the custodian for processing, then tracks the transfer and funding of the accounts. Portfolio rebalancing and trading work the same way. I log on to my Web site and make changes to the model portfolio and submit those changes to BridgePortfolio, which then rebalances all accounts in the model(s) at the same time. What sometimes took me days to accomplish is now done in minutes. I don’t need to spend time reviewing individual accounts, just the models, as I know all accounts synched to a particular model have the same underlying holdings, with the same weightings.

Clients can access reports through my Web site without any help from me. An e-mail is sent to me on the fourth business day of each month announcing that the reports have been updated. I then send an e-mail to clients announcing the same. At quarter’s end, BridgePortfolio sends me an e-mail reporting that my advisory fees have been calculated and are awaiting my approval. After reviewing the fees, I give BridgePortfolio authorization to debit the client accounts.

So with BridgePortfolio, I have all my operational and administration headaches cured. The only thing I have to do on my own is compliance. For that all-important task, I use an outside firm, which in my opinion makes more sense because I believe there are some inherent conflicts of interest if you have your back-office, trading, and reporting firm reviewing itself. I rarely need to log on to my custodian or get involved in trading. In fact, rarely do I need to do anything other than talk to clients and monitor their accounts.

BridgePortfolio’s fees are calculated as a percentage of assets based on the combination of services being provided. The fees are all-inclusive, so no nickel-and-diming for technical support, custom reports, or Web site changes.

Fee breakpoints are on an enterprise, not account, basis; thus more assets equal a lower fee percentage. Fees range from the low single digits to 25 basis points. Compare this to the annual cost of an employee, which writer and advisor David Drucker estimates to be a minimum of $50,000, plus the cost of software and hardware for that employee to use. Keep in mind, outsourcing is not all about saving money, it’s also about efficiency and time. But we are cognizant that our fees need to be reasonable relative to the costs for an advisor to handle it in-house.

I was so impressed by what the firm’s services could do for me that after only three months of working with BridgePortfolio, I began consulting to the firm on how it could improve its platform. My passion for BridgePortfolio’s offerings rose to such a point that I joined the firm full time in October 2002 in a business development and strategy role, as chief marketing officer. To this day, I continue to manage a small group of clients, most of whom I have worked with since the early 1990s. Close to three years have passed since I began outsourcing my back office to BridgePortfolio. I now commit less than 20% of my time to my advisory business, yet my clients receive better service, better performance, and more attention–all at lower fees than three years ago–due to the efficiencies that BridgePortfolio has afforded me. I couldn’t have done this on my own or any other way.

Although I believe BridgePortfolio’s platform to be truly unique, I know that there are companies that offer similar solutions, such as Albridge, Orion Advisor Services, and BAM. I urge you to consider their offerings to see how well they fit into your business model, to determine if their corporate cultures are a good fit with yours, and to calculate what their offerings will mean to your bottom line and fee structure.

I’m biased, of course, because BridgePortfolio has given me the tools to achieve my desired level of success. But even if you don’t pick BridgePortfolio as your outsourcing partner, I urge you to consider an outsourcing solution to your growth problems. For me, outsourcing my back office to BridgePortfolio was the best business decision I ever made.

David Edstrom, chief marketing officer for Inc., can be reached at [email protected].


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