The latest article by Joel Bruckenstein is pretty good. It’s covering what the major custodians are doing to help their Advisors reign in technology. It’s interesting for a couple of reasons, number one, it shows that custodians really are trying to provide value added services, number two it highlights what the major recommendations are from the custodians.

While the details of what each custodian is doing (only three custodians are covered) is interesting, I am going to focus on the key findings from the article. The individual custodians have a different approach and I am sure your custodian has it’s own approach as well. There are some correlating factors that seem to appear across all the custodians.

In the article it states this little tidbit:

According to Stimpfl, TD Ameritrade has identified five key processes that are universal across all the firms they’ve visited. The average firm, he says, spends 300 hours per year on opening new accounts, 350 hours per year on trading, 360 hours per year on generating performance reports, 390 hours per year on managing workflows throughout the office and 450 hours per year doing data reconciliation between custodial downloads and portfolio management software…

This is interesting, it shows that the area with the largest impact is download and reconciliation. At Techfi our outsourced product was also are biggest headache. Not because dealing with the clients was difficult or running reports was time-consuming. It was reconciliation; everyday we downloaded or received hundreds of files from many custodians for many clients.

Half of our support staff was there just to do downloads and reconciliation. Every day there were errors in the files from some custodian and data had to be manually massaged. We had to call custodians to find out what actually happened and make manual corrections. Fortunately, we had economies of scale on our side. If one custodian made a mistake it would be the same across all our customers and we could make the same correction in bulk.

The article also points this out:

…these are just averages, and in some cases they understate the problem. For example, in the area of reconciliation, some firms outsource all or part of the process, so they might only spend 50 hours or less per year on reconciliation. That means that the remaining firms are spending much more than 450 hours per year on this task. Since these processes take up so much time, it should be obvious that any productivity gains here will yield significant savings, and the recommendations that TD Ameritrade has made in recent engagements bears this out

While it seems this should be obvious, often times it’s not. The number of accounts an Advisor has grows, the staff grows and pretty soon you have a full time Portfolio Management System person. It just sort of happens and you don’t really notice. This is begging to be outsourced, certainly a third party can do this for less than the cost of a staff member.

Sadly, it appears to me that outsourcing in our industry is floundering at best and may eventually fail. Having sat thorough many deals at Techfi, the problem is usually cost. I believe that most outsource firms are running on a very tight margin. With all the regulatory and security requirements it’s becoming more difficult (and thus more costly) to do the outsourcing. You have to segregate the client data, the staff have to undergo background checks, the staff cannot have direct access to the database, they have to be physically locked in etc… it’s very expensive.

These requirements were all just starting when Techfi was bought by Advent so the marketplace has changed significantly. Once the data stops going to your dedicated office the requirements increase dramatically. So it comes down to price, can the outsource firms make it cost less to the Advisor than the staff person that currently does the job?

I think so; the software really has to be built for it though. As Matt pointed out in a comment to this post, the software has to be “customizable and extensible”. This is more than meeting flexible requirements for users though. It has to be flexible enough to implement changing regulatory requirements without having to be completely rebuilt.

We are seeing our industry really change and I think it’s for the better. More regulatory and security requirements are going to help keep all this financial data safe. The challenge really will be for technology to keep up with all the changes and really bring the value equation into line.