By James Ash
The beginning of the year is usually a busy time for wealth management firms and the investors they serve. As part of the year-ahead planning that wealth managers and registered investment advisors undergo, they typically evaluate relationships with all of their external service providers.This is a smart tactic for ensuring their businesses are well-positioned to operate efficiently and securely and comply with evolving regulations going forward.
If you decide it’s in your best interest to change vendors, for whatever the reason, it is your responsibility as a fiduciary to conduct thorough due diligence on any service provider prior to signing a contract.
Below are some tips for wealth managers and RIAs to keep in mind when considering prospective third-party service providers:
- Make Sure the Third-Party Servicer Is Committed to Relationship Management: While choosing a new vendor isn’t easy, the hardest part comes after you make your selection and the relationship begins. What happens if you or your clients have questions related to the service the vendor provides? Before signing any contract, wealth managers and RIAs need to make sure the vendor they engage will provide a relationship manager, or team of relationship managers, to work with their practices and serve as easily accessible sounding boards. A relationship with a third-party service provider can only be successful if the provider is just as committed to the goals of the firm they work with as the firm itself.
- If You Focus on Complex Strategies, Check that the Vendor Has Experience with Them: Wealth managers and RIAs need to ensure any potential third-party service provider not only has experience serving clients in the investment management space, but also has familiarity with many of the niche or complex investment products and strategies that have been developed over the last decade. This is especially true if you’re an RIA that operates a mutual fund or another pooled investment vehicle. If you’re in the market for a new fund administrator, would you feel comfortable engaging one that had never helped manage a fund with a strategy similar to yours?
Request from each potential vendor a list of past and current clients so you can speak with references who can provide an independent point of view. If you have unique or complex requirements, ask the vendor probing questions early in the due diligence process about their capabilities and whether or not they can handle your specific fund, strategy or client needs.
- Turnkey Solutions Are Ideal: Whatever outside service your practice needs, receiving that service through a turnkey technology solution that can be integrated with your other systems is most ideal. Turnkey solutions are scalable, making it possible for them to meet your needs as your practice grows, and can be customized for individual client requirements and complex investment strategies or products. In addition, any technology updates to the service you’re paying for can, in many cases, be seamlessly implemented through a turnkey solution, making those updates less expensive and less disruptive to enact.
- Make Sure the Provider Adheres to Established Risk Management and Cybersecurity Processes: Before beginning the search for any new vendor, wealth managers and RIAs should conduct internal risk assessments to understand what risks they face in the marketplace, and what they can do to alleviate those risks. Keep this assessment in mind when investigating prospective third-party service providers—one of the biggest risks to your practice and clients is an external vendor that is careless with client assets and data. During due diligence, ensure that any vendor has an established internal risk management framework and implements regular risk management evaluations and drills. Ask what tests the vendor subjects itself to, and request to see the latest results. Furthermore, with cyberattacks continuing to make headlines, ensure that the provider’s risk assessment processes include a robust set of cybersecurity procedures to safeguard assets and data, and ask to see the results of the most recent cybersecurity assessment or drill.
Your practice’s relationships with third-party service providers should be assessed every six months. If you decide that a replacement is in the best interest of your practice and clients, take as much time as you need to choose the right partner. If you conduct robust due diligence and make sure the vendor you select shares your goals and commitment to clients, you are more likely to avoid making a costly mistake.
James Ash is Senior Vice President of National Sales for The Gemini Companies.