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To Centralize or Not To Centralize Trading? That is the Question

Division of labor is wildly important if you are looking to grow and scale your business.

Operationally speaking, it is the goal of every RIA to free up their advisors to focus solely on clients and prospects. Your advisors’ best use of time and energy, as well as their natural skillset, is to be out of the office growing assets by meeting with prospects and servicing clients in such a way that they refer their friends and family. You do not want advisors, whose primary function is business development, to be locked in an ivory research tower with their green eyeshade, examining P/E ratios and dividend rates, trying to uncover the next great investment opportunity. Keep in mind that from Day 1, Steve Wozniak built the computers, and Steve Jobs sold and marketed the computers—division of labor is wildly important if you are looking to grow and scale your business. This is why RIAs in growth mode will typically outsource investment decisions to a third party or will create a dedicated in-house investment research team to handle portfolio construction on behalf of advisors and their clients.

The same can be said for the trading function. When a client calls and says, “We bought a car! We need $20,000 from our portfolio, please,” the advisor should not be the one pulling up the client’s portfolio and deciding what investments should be liquidated. Again, this is not the advisor’s best use of time or energy. With a centralized back office, the advisor would notify the trading team, usually through a CRM task, that the client needs $20,000 by a certain date. Once the trades have been placed, the trade execution team can put another task into CRM for the client service team to look for the trades to settle, and then they can put the wire on the system to send the money to the client. Once the money has been sent, a notification can go back to the advisor through the CRM letting them know the money successfully arrived in the client’s account, and the advisor can send a “Congratulations!” note or video to the client.

In our experience, the centralized model is most often used by RIAs serving mass-affluent or smaller high-net-worth clients that are predominantly being managed through model portfolios. Using various risk tools and tolerance questionnaires, the advisor can assign the client to a particular model portfolio and then they can rely on the back-office trading and investment team to execute the models and rebalance as necessary. This centralized model is extremely scalable and allows the advisor to focus solely on business development and relationship management. For RIAs serving ultra-high-net-worth clients, whose household may consist of 30 or 40 account numbers and whose assets may be invested across many different asset classes and investment vehicles, the complexity of those client households can make it difficult for someone in the back office, who is an arm’s length away from the client, to manage the investment and trading functions of the client. For those types of clients, we typically see a “pod” or team structure.

With the pod structure, each advisor has their own personal service team who is dedicated to that advisor’s client base. With ultra-high-net-worth clients, advisors may cap out at 50 or 75 client relationships due to the complexity of the relationship.  For these clients, it makes sense to have a smaller team dedicated solely to them—a group that knows the various family members, entities involved in the household, outside intermediary relationships across business managers, accountants, lawyers, etc.

The pod typically consists of a lead advisor, who is primarily tasked with business development—bringing in new clients, and a service advisor who does not go out and find clients, but who manages the client relationships handed to them from the lead advisor. Below the service advisor in the pod is an analyst or portfolio manager who understands the 30-40 account numbers that make up the household and the nuances of the various investment vehicles in the client’s portfolio. The pod’s analyst will be the one who raises money across the various accounts when a client calls in asking for a wire to be sent for a home purchase or new business venture, etc. Underneath the analyst in the pod is the client administrator or client relationship manager. Their job is to move money across the various accounts and entities within the household, open new accounts, process charitable donations, link outside accounts to the performance reporting tool, etc.  RIAs will then multiply this pod by the number of lead advisors in the business. While not nearly as scalable as the centralized model, the pod structure is highly efficient for serving complex clients, especially for those RIAs touting themselves as a “multi-family office.”

The choice to centralize trading is usually determined by the complexity of your firm’s end clients and whether they can be managed through liquid model portfolios or not. For clients requiring some level of customization and perhaps with some complexity to the household, you may need to bring the investment function closer to the end client. This is usually solved through a pod or team organizational structure. Whether centralizing trading or not, it is imperative that the investment and trading function be removed from advisors’ hands for RIAs looking to grow aggressively.


Matt Sonnen is founder and CEO of PFI Advisors, a consulting firm that helps financial advisors build more impactful and profitable enterprises. He is also the host of the popular COO Roundtable podcast.  Follow him on Twitter at @mattsonnen_pfi

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