As the RIA industry continues to grow and win market share from the traditional banks and wirehouses, RIA owners are faced with a dilemma: How do we serve more clients without the quality of our service deteriorating? In a relationship business such as wealth management, the only real way to scale is to add more employees as the number of clients and assets managed by the firm increases. Considering salary + bonus + benefits + equipment needed for each employee, human capital can make up to 70% to 80% of an RIA’s expenses, which can erode profit margins quickly if not managed carefully. This is where the concept of outsourcing comes into play.
RIA owners are often told that as their firms grow, they will not need to hire additional staff because they can outsource many of the core functions of their business: trading, performance reporting, IT, human resources, compliance, etc.—and not only can they outsource each individual function, but there are plenty of firms offering to handle all of these on behalf of the RIA. By outsourcing these core functions, advisors can focus solely on clients and prospects, and everything else will magically run smoothly in the background. Or so it would seem. What isn’t made clear to these RIA owners is that regardless of the nature of the task you are looking to outsource, it is imperative that you understand there will always be components of them that will remain the responsibility of your internal team.
Take compliance, for example. Your firm can hire a competent compliance consultant, but even with their guidance, someone internally must monitor that employees are turning in their quarterly transaction reports, or must maintain a restricted list if your firm works with corporate insiders, or ensure your best execution committee is meeting on a regular basis, etc. It is invaluable to have a compliance consultant who you can reach out to with questions or who can provide your internal CCO with a calendar of tasks that must be completed each month, but it is foolish to think by hiring a consultant your firm can wash your hands completely of all compliance responsibility. With assistance from the consultant, someone internally will still need to manage the compliance program for your organization.
Payroll is another area where RIAs get tripped up. They often think, “We’ve hired a payroll provider; that’s now taken care of for us!” But every two weeks, someone internally must report sick time and vacation days for any employees that were out of the office during the latest pay period. Depending on how many employees the RIA has, simply tracking PTO and submitting timesheets to the payroll provider can become a full-time job in itself! Someone on the RIA’s management team will need to act as a liaison between employees and the payroll provider.
Many RIAs leverage a managed service provider to manage their IT network, provide desktop support to employees and offer cyber security protection for the firm and its data. But firms leveraging these services from an outsourced vendor know all too well that they cannot rid themselves of all IT responsibilities: Someone internally must act as the point person for the IT vendor. If the phones go down, for example, who is the internal resource that will contact the IT vendor to troubleshoot the problem? If the power goes out locally, who will physically turn on the power for all computers and network equipment in the office? The outsourced IT firm will need someone onsite to possibly reset the switch or reboot the firewall, etc.
After hiring Addepar, Orion, Black Diamond, etc., many RIAs sit back and say, “Well, we have outsourced performance reporting!” and feel they no longer need to spend time or resources on the task of creating performance reports, householding accounts, creating billing groups, customizing portal views for clients, classifying asset classes and securities … the list goes on. Performance reporting vendors sell technology solutions that allow the RIA to manage performance reporting; it is not an outsourced solution at all. Most RIAs have a full-time employee dedicated to performance reporting. Many firms employ an entire team of employees tasked with all the nuances of performance reporting, especially if they are invested in alternative investments.
It is vitally important to have an honest conversation with a potential outsourced partner early in the due diligence process. Ask them, “Exactly what components are you handling for me, and what tasks will you still need our team to handle?” It may be that the vendor is merely handing you tools to process the task more efficiently, and contrary to your early understanding, they are not offering an outsourced solution at all. Or, like an outsourced compliance consultant filing your ADV, there may be a very detailed questionnaire and quite a bit of data gathering required on your part before they can complete the process on your behalf. To have the most fruitful relationship possible with outsourced vendors, you need to have a clear understanding of exactly where in the workflow they are removing tasks on your part and where you will need to maintain some level of responsibility.
Matt Sonnen is founder and CEO of PFI Advisors, as well as the creator of the digital consulting platform The COO Society, which educates RIA owners and operations professionals on how to build more impactful and profitable enterprises. He is also the host of the popular COO Roundtable podcast. Follow him on Twitter at @mattsonnen_pfi