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Posing the Proper PMS Questions

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As an investment advisor, there are three pillars that support your practice: portfolio management, distribution, and operations. One support–operations–is uniquely tied to client service. Since an advisor’s core responsibility is keeping existing clients happy and obtaining new ones, maintaining constant focus on the operations side of the business is vital (see Mark Tibergien’s column). The only problem is that most advisors did not get into the business to run the operations side but rather to manage money and gather assets. Advisors are nevertheless faced with the overwhelming and time consuming job of becoming back-office experts as well.

Portfolio management systems are a critical business operations component. But how do you know if your current system is the best fit for your practice? The field of providers (including my company) spans the spectrum, including long-time players and startups, and the range of solutions is equally varied. Options range from in-house technology solutions that run on the advisory firm’s network to off-loading the function to an outsourcing partner who provides both technology and staff.

We will lay out the key questions that you, the advisor, should consider if you want to take your firm’s client service to the next level and are in the process of selecting a new portfolio management system.

Think Big

Listing business needs in terms of what is important to the advisor and to the advisor’s clients is an important first step. Use that list to prioritize the most pressing areas. Avoid limitations and think creatively; there are plenty of solutions out there. A good solution should fill in any gaps in the firm’s service model, keeping functionality and reporting clear and simple. The following sample questions will help begin the prioritization process:

  • Does the system interface with my custodian(s)?
  • Do I need to supply clients with realized gain/loss reports?
  • How can I best report performance to my clients?
  • Will the system calculate AIMR-compliant composites?
  • Can the system help my staff ease the new-account process?
  • Will the system help ease advisory fee billing and collection processing?
  • Can the system provide advisory fee payout information (sub-advisors, broker/dealer overrides, soliciting representatives, etc.)?
  • Will the system help me trade my client portfolios?
  • Can the system help me promote my firm’s image (i.e., marketing)?
  • Is the system accessible to me and my staff via the Internet?
  • What are the hardware and staffing costs associated with working with the system?
  • What do I need to do to back up the system and keep it secure (business continuity plan)?
  • Does the system take care of the compliance reporting requirements for my business?
  • Will the system allow me to focus on money management and gathering assets rather than operations?

The way your PMS system works–or doesn’t–with your custodians is crucial. Strike from your requirements those reports and information custodians are already providing clients to avoid redundancies and extra costs. It is imperative to be able to easily transfer client data into and out of the portfolio management system, so interfacing with current or future custodians is crucial. The vendor should explain to you the process of bringing on a new custodial relationship and list the interfaces the portfolio management system supports.

Ease of extracting and adding client data will be significantly enhanced if the system is built on a “relational database,” making it possible to query data in the system and run business-specific reports to support your client relationship model. Systems built on Microsoft’s SQL Server or an Oracle database should provide such functionality.

Be sure the database hierarchy supports the advisory firm’s client relationship model. Find out how the system ties information from multiple accounts across many custodians. The database hierarchy and structure of clients, registrations, accounts, assets, and transactions affect generating reports that are consistent with client relationship models.

Using the Data

Once the data is in the system, how can it be used? Many advisors use their portfolio management systems to capture or warehouse data from their custodian or brokerage platforms. The challenge is finding a system that does more than that. Some practices use “side reporting systems,” like an Access database, in addition to a portfolio management system. The optimum choice of systems should capture a variety of needs into one holistic solution. Running two or more databases is difficult, expensive, and inefficient.

Financial planning tools or software, a contact management system, and accounting software must all work with the chosen portfolio management system as well. A system should either contain its own solutions to these types of functions, or at least interface and run side-by-side with them. It should be user friendly. The data entry screens should be organized for quick and efficient keying and searching. Be sure the system can work from spreadsheet imports and support custom fields. When considering an outsourcing partner, make sure it is possible to interact with the outsourcing company’s data. If not, time will be wasted verifying that the vendor has made simple account maintenance updates.

Owning the Data

The question of who really owns and controls client data is often viewed by advisors only from the perspective of where the data server is located. However, to fully address data ownership, it’s important to broaden that viewpoint to include the following control and ownership questions:

  • Will the portfolio management system contractually allow for retention of ownership of the client data?
  • What will it take to convert the data from the portfolio management system to a new system, and is that process outlined in the contract?
  • Is the agreement made directly with the portfolio management system provider or is my company accessing the data through a broker/dealer’s or custodian’s agreement with the system provider?

Advisors need to ensure broad consideration is given to the contractual relationship with the portfolio management system so they retain true ownership and control of their client data. Advisors need to make sure the vendors will supply data to them in a useable format. This becomes especially important if at a future point you decide to change your PMS system.

Converting Data

Even with the issue of data ownership solved, some advisors still opt against taking historical data with them to a new system, as history conversion can be a major stumbling block to overcome in converting to a new system. Some systems charge advisors out-of-pocket fees for conversions, while others simply will not do it.

In many cases, historical conversions are completed through third parties that have expertise converting data from specific systems. Is it worth it to bring the data to the new system, or is it better to rely on the existing solution for historical data when needed? Advocates from both sides are numerous; the final determination will be based on the advisor’s business model and the reporting efficiencies gained from having historical data in the new system. One solution is to convert historical tax and performance lots as opposed to all the transaction history.

When transferring history, be sure to avoid doing so at the end of the quarter. Find out from the new provider how long it will take to convert the data to the new system and the current length of their conversion line. Consider asking what sort of training and service is available during this time; it will take time for you and your staff to adjust to the new system.

Both systems should run side by side as a contingency to ensure client reports go out on time and service levels do not suffer during conversion. Do not go into the conversion process short-staffed–you should expect to put in extra effort and staffing at the beginning of the process, whether you pick an in-house-only solution or a partner.

When Outsourcing Is Right

Outsourcing is becoming more and more prevalent, since keeping your PMS function in-house adds up: employee salaries, benefits, vacation time, costs of hardware–servers, PCs, printers–disaster recovery, data backups, training, management, employee turnover, stamps, pens, paper clips. Adding a $35,000 salaried employee can easily end up costing you two-and-a-half times that amount, especially after adding in opportunity and margin costs and other expenses associated with hiring.

Outsourcing the portfolio management system is not a walk-away proposition, however. The relationship still requires management, just as with an in-house solution. Think of outsourcing along the lines of delegation. The end goal is a more efficient office. In addition, there is nothing less efficient than relying on your outsource expert to complete menial tasks that can be accomplished in house at a fraction of the time and cost, such as updating a client address or adding a new account. That is why it is important to have the ability to easily and directly manipulate the data, and allow the outsource professionals to do what they do best. The essence of efficiency is staying in touch with those to whom this function is being delegated, while retaining control of the practice.

Finding and switching portfolio management systems and outsourcing partners is time consuming. While it’s normal to expect this decision to be made only once, the reality is that things change. Occasionally, systems do not perform as expected or partners outgrow each other.

Think about the future by asking about the vendor’s financial and organizational stability. Ask the PMS provider to share its organizational chart and financials. Do not be afraid to do a due-diligence trip–this is an important decision for you, after all. What are the five-year plans for the firm and its system? Ask the firm about its current stand on proposed buyout opportunities. Find out what kind of assurance and security they can offer over the long haul.

Due diligence should provide comfort that a system is in place that will adapt as your practice grows and transitions. While the transfer process may seem arduous, companies forced into a portfolio management system transition resulting from a buyout or another business event should not wait to find a new partner.

These events can cause a disruption in the availability of technical support and some advisors may not realize the inherent risks this creates. If this sounds familiar, consider the following issues:

  • Pricing vendors. What if a pricing vendor either alters the format of the data files or alters the way in which the files are retrieved?
  • Realized gain/loss reports. What if the tax laws change for holding periods of capital gains (long vs. short)?
  • AIMR composites. What if the standards change with regard to reporting performance composites?
  • Custodian trade upload files. What if a custodian changes file formats for uploading trade files?
  • Custodian interface files. What if the custodian either alters the format of the data files or alters the way in which files are retrieved (such as FTP versus https)?
  • Delays in getting conversions done. It typically takes 60 days to convert from one portfolio management system to another.
  • Hardware failure. If your server fails, what if you have reinstall problems with your hardware? There might not be support.
  • SEC audits. What if the SEC asks for information or a report that the system does not currently produce?
  • System bugs. What if you get an error when you try to run a report?

Make an Informed Decision

Changing portfolio management systems is a big step for any firm to make. Conducting due diligence on your vendor is a must. Knowing what you want and need, and then prioritizing those needs, is crucial in the decision-making process. Look for a solution that meets those needs. Don’t underestimate the opportunity cost of outsourcing–it should free up time to focus on core strengths. Asking the right questions will lead to a solution that fits each advisor’s practice.

Eric Clarke is founder and president of Orion Advisor Services, an Omaha-based back-office services company that provides a Web-based portfolio management system and an operational service bureau to registered investment advisors. He can be reached at [email protected].


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