Why do RIAs outsource their back-office operations?
It is not only because they want to focus on their client relationships and engage in the financial planning details that drove them to become advisors.
Sure, that is the main reason. Advisors want to get paid, and are legally obligated to report on client portfolio performance. These are essential and time-consuming but not the highest added value tasks an advisor must do.
Or as Julien Mordecai, CEO of AllBackoffice Consulting puts it in an interview with ThinkAdvisor:
“Processing data is a lot like taking out the trash — it’s something most advisors feel comfortable letting go of.”
But while advisors are typically referred to the Edenton, N.C.-based firm for billing and performance reporting, the relationship tends to expand to broader-based technology consulting for the same reason the relationship started: advisors need and want to focus on the bigger picture, but the gears and shafts within an advisory practice have a way of needing expert attention now and then.
As an example, an East Coast RIA client of Mordecai’s made a strategic decision to acquire other practices.
While there’s much potential glory in scaling up to a national presence, this RIA has struggled for eight months to integrate the back office of a California practice the East Coast advisor bought.
“There have been problems normalizing the data in the portfolio reporting system — to reconcile that to the way this this advisor’s been doing his performance reporting,” Mordecai relates.
The acquiring advisor is a “Type A,” really neat; the acquired: not so much.
Having a third-party consulting firm involved in the integration does more than just take out the trash; it injects needed diplomacy in to the process.
“Instead of perception [on the part of the acquired firm] of ‘Hey, why do we have to do it this way? Our system has always worked for us in the past,’ we’re coming back to them saying, ‘This is the best practice; eight or nine out of 10 advisors do it this way and this is why.’”
Having a tech partner also keeps the workflow going on nettlesome issues. Performance reporting does not mean all clients get the same pie chart. In the acquisition case, the acquiring advisor classified stocks specifically — large-cap growth or large-cap value, for example — for a stock that the acquired practice characterized simply as large-cap.
For that reason all assets in the California office need to be reclassified — a process that could take considerable time without third-party involvement.
AllBackoffice currently works with about 70 RIA firms with assets under management typically ranging from $20-$30 million to $500-$600 million, Mordecai says.
That level of business is usually a 2- to 3-advisor partnership that does not always have an operations manager but is “growing enough that the challenge to their team is that they don’t have the time to think about what technology they’ll use and how to integrate it,” Mordecai says. (For sole practitioners, working with an outsourced back office is a “no brainer,” he adds.)
“The advisors might have come out of a large institution … where they had full support and now they have to do it themselves or their business falls apart,” he says. “Our account managers consider themselves to be personal technology and operations consultants.”
But Mordecai stress that does not mean AllBackoffice will shake up the advisor’s technology, moving them to products they’re unfamiliar and uncomfortable with.
Rather, the firm tries to get a big-picture view of what resources the advisor is already making use of and determine what systems work best together.
“He may have access to document storage that he does not know about; we’ll help him with his due diligence and manage migration,” he says, adding that “technology tends to work in suites.”
While there is a lot of superb technology available, Mordecai says most advisors don’t know how to leverage it. He compares it to the thousands of apps on an iPhone. While nobody is going to use all of them, the challenge is making optimal use of what is available.
Just as the iPhone user needs to be able to make phone calls, send text messages and view email, an advisor minimally will need portfolio accounting software and some sort of administrative infrastructure set up so that when he creates a client proposal, he has some place to put that — preferably, these days, in the cloud.
Those are the basics that keep an advisor’s business alive, but other options — such as a CRM that is perhaps more robust than Microsoft Outlook — could be used to help the business thrive.
Advisors, of course, have different definitions of what success means. On the other end of the spectrum from the enterprise-building RIAs he works with, Mordecai also works with boutique RIAs more interested in spending time with their families or on their yachts.
Such advisors, he says, need to simplify.
“They’re looking for as much leverage as possible” to acquire not books of business but time.
“One very good way of reducing meetings is encourage clients to meet over the phone (using software like GoToMeeting) and going paperless,” Mordecai says. “An awful lot of advisors write their own newsletters — that causes a lot of stress; it drags through two or three weekends of their time. In that case, we’d recommend a content partner.”
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