The Benefits of Outsourcing Your Wealth Management Platform

When assets are scarce, costs for portfolio management, research, trading, client service and compliance remain fixed. A turnkey investment management platform, with fees based on assets under management, can reduce costs and unlock strategic flexibility.

[caption id="attachment_14234" align="alignright" width="70"] Joseph MrakChairman & CEO,FolioDynamix[/caption]
Could the post-credit crunch death spiral experienced by so many wealth management firms have been avoided with an outsourced investment management solution?
For example, consider that one 37-year-old wealth management firm saw its assets under management decline by half from 2007 to the present, while its overhead costs remained constant.  From its pre-crisis peak of $49 billion, the firm’s assets have sunk to just $25 billion, the victim of poor investment performance, high operating costs and higher-than-average investment management fees.  
This experience is, unfortunately, not unusual. As assets dwindle, costs for portfolio management, research, trading, client service and compliance remain fixed.    Indeed, increasing complexity and the cost of maintaining aging systems may make it even more costly to manage assets over time.

One possible solution?  A turnkey investment management platform, with fees based on assets under management, would have reduced this firm’s costs as its assets shrunk.  It might have given the firm the time and flexibility it needed to respond to changing market conditions.

Addressing Complexity, Managing Costs

The years since the 2007-2008 correction have been particularly challenging for wealth managers, due to increasingly business complexity and declining assets, revenues and profitability.

The complexity is partly technological, since all asset managers now maintain an increasingly diverse set of systems and functions, juggling software for proposal generation, research, portfolio accounting, trade order management, performance measurement, operations and business process management, client servicing and compliance.

It also comes from product proliferation, since firms that offer a wide range of wealth management programs, such as rep-as-PM, UMHs, UMAs, and separately managed funds may need different client services systems for each type of account.

At the same time, asset managers are under relentless cost pressure.   As AUMs have declined – in many cases down to one-third of pre-recession levels – staff and overhead costs remained high. Many firms have failed, and even surviving firms have seen profits plummet.

It’s not surprising that a recent State Street survey rated “reducing costs through enhanced efficiency” as a key business objective of wealth managers, right behind supporting and enabling business growth.

It took a little time, but now it feels like everyone in the advisory industry has realized that mere survival is a poor runner-up when you have a chance to actually thrive.

As everyone is aggressively prospecting for premium clients, mass-market accounts and retirement plans, it’s a zero-sum game: the winners are the ones who can rip assets away from the competition fastest. In the quest for a more efficient way to operate, many firms have turned to outsourcing their wealth management platforms – both their technology and their portfolio management strategy.  This trend is transforming the industry, thanks to three key benefits: efficiency, quality and scalability.

Efficiency & Focus

Turnkey outsourced platforms integrate asset management operations from end to end, allowing financial professionals to concentrate on key business objectives like acquiring and retaining customers, making better investment and trading decisions and running operations more efficiently. By integrating many different functions, these platforms can help firms increase operational efficiency, reduce costs and enhance the customer experience.

Turnkey platforms integrate systems that may have been previously separated according to product line or account type.  They demand less staff time, since employees don’t have to repeatedly perform the same functions in different systems.  They are also less costly to maintain, since business owners are buying one system rather than many.  Eliminating the burden of siloed systems enables firm managers to concentrate more fully on what’s truly important for building the business – delivering outstanding investment advice, strong performance and a higher level of customer service.

Further, turnkey outsourced platforms are updated continually.  Business owners don’t need to worry about investing in soon-to-be obsolete technology that puts their firms at a competitive disadvantage.

Quality Research and Investment Advisory

Turnkey platforms also provide firms with access to higher quality research and portfolio management services than they might be able to produce internally.  Top-of-the-line research can help firms retain current customer relationships and add new ones at a faster pace.  Outsourcing also enables asset management firms and their customers to benefit from portfolio management strategies that have been thoroughly vetted for quality and performance.

Program & Platform Scalability

A flexible outsourcing platform enables wealth managers to choose the precise combination of services and tools they need to serve clients. If a firm’s needs change, it’s easy to add new products and services to its offerings.

Furthermore, a flexible outsourced platform enables firms to scale the platform for their needs.  It ensures that wealth managers have the appropriate level of staff and technology for any given size of AUM or combination of account types.

Turnkey Platform as Key to Industry Convergence

The use of a turnkey outsourced wealth management platform is the embodiment of the industry’s convergence that I referred to in my June 28 article on this website, “Get Ahead of the Industry Convergence Curve and Thrive.” In that article, I asked the question, “Is your operation embracing the future, or hanging back in a world of silos?”

The article presented a discussion of a report from financial industry research firm Celent, titled “Growing Efficient Advisory Programs through Platform Consolidation: Developments in Managed Accounts.” (Get the report HERE.)

In my article, I emphasized the belief that we are entering a “golden age” of convergence, where the wealth management industry has begun to unbundle itself from the product and technological silos in which it has been bound.

Convergence has already begun to break down these silos and bring about further operational efficiencies. It is also enabling wealth managers to provide greater service to clients by focusing on their greatest competitive advantages – adding value through investment advice and research, and offering seamless investment choices to ever-more-demanding clients.

A Turnkey Outsource Success Story

To understand how turnkey outsourcing platforms can add value, consider the experience of one RIA who adopted this approach.  This RIA, a regional broker dealer, had independent advisors located throughout the US and had established strategic alliances with several of the top advisory clearing firms in the industry. The firm’s management was committed to offering its advisors best-of-breed programs, services and technology.

The RIA wanted to implement a single desktop for all of its fee-based business, with support for rep-as-advisor, rep-as-manager, mutual fund wrap and UMA overlay portfolio management problems.  The firm also needed to reduce operating costs and increase users’ efficiency.  That meant outsourcing a variety of functions that had previously been performed in-house, including: manager research, asset allocation, portfolio construction, mutual fund wrap and overlay management operations and administration.

The firm chose the FDx SingleSight unified wealth management platform to consolidate its fee-based programs into a single web-based advisor desktop for its advisors.  The FolioDynamix platform enabled the firm to shift from its existing, higher-cost traditional separately managed account to a lower-cost UMA platform.  Finally, by partnering with FDx Advisors, the RIA arm of FolioDynamix, our client was able to outsource its investment-related functions, including research, mutual fund wrap and overlay portfolio management to FolioDynamix as well.

By selecting a single provider for both platform technology and outsourced investment services, this firm is now free to focus more fully on its core competencies.

Moving Forward

In an increasingly complex and competitive environment, wealth managers need every advantage. Turnkey platforms can help wealth managers enhance services to clients, while generating increased efficiencies and cost savings that lead to increased profitability.

This publication does not represent investment advice. All opinions and results included in this Publication constitute FolioDynamix’s judgment as of the date of this Publication and are subject to change without notice.

As Chairman and CEO of FolioDynamix, Joseph Mrak has led the company’s growth from its inception in 2007 to its current position as a fast-growing leader and innovator in the wealth management industry. With 20 years in the industry, Joe is an established thought leader and entrepreneur known for his vision and ability to evolve technology and investment products to meet the dynamic needs of leaders in the industry.



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