By Karla Paxton
This is the third installment in our series of transitioning to an RIA. Part 1 discussed selecting a custodian, and Part 2 discussed selecting in-house software for your operations.
 Outsourcing or in-house? What do you want to spend your time doing? As an independent advisor, the responsibilities of running a business, as well as the responsibilities of meeting your clients’ needs are now on your shoulders. A myriad of areas needs to be addressed. If you don’t want to hire staff to perform these duties, outsourcing is an option. A number of well-established companies provide outsourcing for portfolio data management, reporting, human resources, compliance, billing and investment strategy. Some provide multiple components, like portfolio reporting and billing.
Portfolio data management and reporting is the one area where it makes the most sense to outsource, because it requires an understanding of investments, accounting, and a technical or computer systems background. It can be a challenge to find the right person to do these tasks in-house.
Although you must maintain and provide portfolio data, this is not a revenue generating area for your firm. Outsourcing leaves you and your staff time to concentrate on your clients and the true revenue generating areas. Since you need information at your fingertips when analyzing your client’s portfolios, having someone outside the office troubleshooting and creating your quarterly reports takes the pressure and stress out of the office.
To get the most out of your portfolio data management system you need to follow a process. The investment and account data must be gathered. Much of the data will be available electronically through your custodian(s), but if you monitor alternative investments or have assets held at custodians that do not have download capability you will need to find an alternative way of feeding data into your system. In a previous article, we discussedsoftware that captures account information off the web, as an alternative to hiring someone to manually enter statements. Unfortunately, reconciling the data and maintaining the system’s database requires a lot of time. Portfolio reporting is critical to building client relationships. Many reports are available on the fly, but it is useful to have the ability to create custom reports. Outsourcing the data collection, reconciling, and reporting will often save money and reduce errors.
Below is a representative - but not necessarily comprehensive – list of firms providing outsourcing services In addition, many smaller shops and individuals offer similar services.
Service Providers for Schwab’s Portfolio Center
Service Providers for Advent’s Axys
Service Providers for Schwab’s Portfolio Center and Advent’s Axys
Investment Strategies and Performance and Tax Reporting (proprietary portfolio management system)
Investment Performance Reporting
When considering an outsourcing solution for your firm you want to assess the following capabilities for prospective vendors:
- Ability to download electronically from major custodians, including the specific custodians you plan to use.
- Ability to capture transactions off the web for assets not held at major custodians.
- Handling of all asset types: fixed income, equity, mutual funds and alternative investments.
- Support for entering assets manually if not available electronically.
- Whether the data will reside on an in-house server or on the web.
- Web access for your firm as well as through a client portal.
- Ability to produce reports that consolidate all the client’s investments.
- Target versus actual allocation reporting capability
- Will you have a single point of contact or are you working with a team, and do they understand investments as well as the technology?
- Ability to retrieve data from the system in order to create custom reports.
- If you decide you no longer want to use the outsourcing solution, is the data easily retrievable and can you bring it in-house or convert it to another solution?
- Comprehensiveness of documentation and procedures.
- Extent of user training.
- Disaster recovery plan.
- Billing solution capabilities.
Carefully examine the vendor’s pricing model, and understand how they charge for transactions, assets under management, types of investments, the way the data is delivered, the type of reporting, and the number of accounts. There are many ways to charge for this service. What is important is that you understand how they will charge you, what is included, and what is extra. Analyze the cost of achieving the same results in-house. How many employees would you have to hire, at what salary and benefits? Outsourcing allows you to hire staff to service your clients, keeping your back office lean. Expect to have a person on staff to manage the relationship with the outsourcing firm - someone who understands investments and the technology behind the system. Look at your return on investment not just in the short term but the long term. It may not be the cheapest solution up front, but by concentrating on your core competencies and growing without hiring additional staff you will reap benefits.
Your outsourcing firm will become an extension of your firm, and will be a partner in providing your clients with the best service possible. Talk with everyone, especially the individuals that will be handling your clients’ accounts on a day-to-day basis. You want the person in your office and the person at the outsourcing firm to have a good working relationship. Ask for and speak to references. Ask for their service agreement and implementation plan, and demand that the tasks, projects and timelines are detailed.
Outsourcing your portfolio data management is a good solution if you have your costs under control and areas such as client service and portfolio construction are in good order. It can also be a service that grows with you. Start with the basics of data management, downloading and reconciliation and then add services like trading, model rebalancing, billing and reporting. Evaluating and implementing an outsourcing solution can be a daunting process. There are consultants that will take an overall look at your firm and provide services based on your specific needs.
Karla Paxton is an independent consultant with a practice that helps investment advisors with their transition to an independent RIA model. She can be reached at .
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