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Practice Management > Building Your Business

Building a Business, Part I: The Benefits of Technology in Due Diligence

By Mike Patton

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What a week! Business is really picking up! The RIA has such a competitive advantage over brokers and this will remain true until every broker in the land becomes an RIA, at which time the advantage will disappear. Significant changes in the regulatory rules could also close the gap (see comments from fellow IA blogger Bob Clark here on the Obama White Paper).

Now the fact that I am so bullish on the RIA way of life doesn’t mean that an RIA will necessarily win the client every time. To the contrary, illogical as we humans can be, some people have their minds made up and nothing will change that. Also, there are some very skilled brokers who operate in an ethical manner and really do look out for their clients. I’m only stating that as a general rule, all else being equal, the RIA has a leg up, so to speak.

Another thing I enjoy as an RIA is the opportunity to be creative. Let me be clear: creativity without ethics carries with it the potential for abuse. However, being creative in an ethical manner brings the very best to the client. Here’s what I mean.

Technology

Technology may not be the Holy Grail, but it can be very helpful. Bill Gates once said, “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.” I have long needed a tool to help me manage client assets efficiently. I’d like to describe one such tool I have recently created.

As a fiduciary, I am not held responsible so much for the returns I bring to clients as I am for the due diligence process I employ. If I have a well-crafted, well-thought-out process, then I have met this requirement.

To this end, I have created a fiduciary scorecard (I realize I’m not the first) which ranks each mutual fund according to a predetermined set of criteria. I’ve chosen five broad categories. They are risk, expenses, relative performance, stability, and style consistency. Each of these broad categories is broken down into subcategories. For example, one subcategory for risk is standard deviation. A subcategory for relative performance is a fund’s ranking within its appropriate category, such as large value, intermediate- term bond, etc.

All I have to do is copy and paste a few things and everything else is automated. The report is one or two pages depending on the number of funds. I will run this each month to monitor all funds I hold in my practice. I’m very excited about this! I’ll write more about it later.

Thanks for reading.

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