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Also available as podcast (Episode #136)
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What Does The “Portfolio Management” Tool In An RIA Tech Stack Do?
TL;DR – There are typically three core pieces to an RIA “tech stack.” They are CRM, Financial Planning, and Portfolio Management. A Portfolio Management tool typically does a lot more than just provide a way to manage portfolios. While trading, rebalancing, and investment model implementation are common features, so are tools such as performance reporting, client fee billing, client portal, etc. As a Portfolio Management tool is typically by far the most expensive component of a tech stack, it is important to understand what to look for in such a tool, and whether you even need one to begin with.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcript:
What does the portfolio management tool in an RIA tech stack do? That is today’s question on the Transition To RIA question and answer series. It is episode #136.
Hi, I’m Brad Wales with Transition To RIA where we help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources we make available from this entire series in video format, podcast format. There are articles, whitepapers, all kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
On today’s episode we’re talking about what’s often referred to as a tech stack in the RIA space, specifically the “portfolio management” component of a tech stack.
As a little backstory, there are literally hundreds of fintech solutions in the marketplace now that RIAs have available to them to potentially use. They do all kinds of different things, and fall under all sorts of tech categories.
Typically though, a so-called RIA tech stack is made up of three core pieces.
Before I tell you what those three core pieces are, let me walk you through where a tech stack comes into play.
A typical arrangement with an RIA, and this depends on the custodian you choose, which I’ll come back to in a second, is an approach where you choose a custodian and then you build separate tech from the custodian. Again, that’s referred to as a tech stack. Which include the tools you’ll use for most of the interactions you have with your client, and to facilitate the different services you provide for them.
Within that tech stack, you’re potentially choosing from hundreds of different options. But from that there are three main core pieces of that technology. Those three are a CRM, a financial planning tool, and then today’s topic, tech that is typically referred to as a portfolio management tool.
You’ve probably heard of names like Orion, Black Diamond, Advyzon, Tamarac, CircleBlack. Those are often thought of as so-called portfolio management tools. That’s what we’re going to get into on today’s episode.
And like I said a moment ago, this in part will depend on what custodian you choose for your RIA. I just recently did an episode on many of the considerations that go into how to choose the best custodian for your RIA. So, take a look at that as well.
But basically, depending on the technology that your custodian provides for you will dictate how much of a tech stack you need to build on your own as well. And you might not even need a portfolio management tool, depending on the custodian that you’ve chosen. Again, check out that episode as well. I’m happy to have that conversation with you.
So, just know that while a portfolio management tool is used in many instances, it’s not used in all instances. But I do want to dive into what it is, where it does make sense to use.
As a little backstory of how we got to this point of having portfolio management tools, I’m going to get into what exactly they do for you.
If you go back far enough, 10+ years ago, there weren’t nearly the fintech solutions supporting the RIA model that there are today. The tech landscape has evolved tremendously over the years.
But there was a time when you were building technology for an RIA, building that technology stack, most every piece of tech was a single purpose tool. You used one piece of software to create performance reports for your clients. You went to another piece of software to run the client fee billing. Another to do trading and rebalancing.
Over time, perhaps because of competitive pressures, or opportunities, there are firms – some of which I named, again, the Orions, Black Diamonds, and Advyzons of the world – that said… “let’s bundle some of those pieces up together.”
In some instances, they built the tools themselves. In other instances, they acquired them. Either way, the idea was to bring them together under this generic sounding “portfolio management” tool, which actually does several things.
So, what exactly did they piece together or build? Some of the main pieces of a portfolio management tool include the following.
Trading and rebalancing
First, a trading and rebalancing tool.
Perhaps you create your own investment models, or you use 3rd party models, and you need implement them. Or if you want to do rebalancing across multiple accounts all at once. That trading, rebalancing, model implementation, that is typically done within a portfolio management tool.
And if anything, that’s the one that fits the name most closely, that you’re managing the portfolio. It saves you from having to go into each individual account every time you want to do a trade.
So, the first main part of a portfolio management tool is that trading and rebalancing.
Client fee billing
Next, they typically all have a client fee billing feature.
As a reminder, a typical setup with many of the custodians, not all, is the custodian relies on you as the RIA to instruct them on how much to deduct from the client’s account for your fee.
We’re starting to see more different types of fee schedules used, but to use the most common example, and possibly what you’re using now, particularly if you’re a large broker-dealer firm, is the traditional quarterly fee billing. Which might be in arrears, might be in advance. There are different ways to calculate it.
But the idea being that with many of the custodians, they basically sit back, for lack of better term, and say… “RIA, tell us when you want us to deduct the fee, and how much to deduct, and we will do that and remit it back to you.”
And so you need some way to do that.
Now, if you go back far enough, some of that was done manually on spreadsheets where RIAs would download client data at the end of each quarter, do a V-lookup on a separate spreadsheet of what each client fee % is, run that math, and then submit the instructions back to the custodian for processing.
Most of that is much more efficient nowadays and driven by technology. And they’ve become very sophisticated. They typically will offer far more fee options than just the traditional, maybe quarterly in advance fee. Some RIAs now bill monthly. Some base the asset level of a daily average balance over the fee period. Etc.
Doing the client fee billing is a core piece of a portfolio management tool.
Performance reporting
Another feature common with portfolio management tools is to run performance reports.
A cornerstone aspect of the RIA model is that custody of the client assets is separate from the RIA itself. Hence why you have a third-party custodian that holds the client assets. And not just holds the assets, but for safety reasons the client always has the ability to go directly into their account at the custodian to see their account balance, and statements generated by that custodian. That will always be there.
However, it is common nowadays that RIAs want to be able to provide their own reports to their clients as well. Maybe they want to show data in additional ways that are not reflected on a typical custodian statement. Perhaps showing performance over some period of time in the account. Or they want a more branded experience with the reports.
Being able to make such reports is another feature that’s typical in a portfolio management tool. And that’s something you would decide what to use, how often to create them for clients, etc.
That’s all things you have the flexibility to decide, but you need some sort of tool to help you create it. Which again is common with portfolio management tools.
Client portal
Another common feature is a way for you to give your clients access to what’s often referred to as a “client portal.”
Again, for industry safeguarding purposes, the client always has the ability to go directly into their account with a custodian. But it’s also common, particularly with RIAs of size, to have a separate client portal tool for clients to log into.
When you go to an RIA’s website, you’ll typically see a “Login” link. While some RIAs simply have that link go to a custodian’s account login page, many RIAs have that link go to their branded client portal.
The client portal is pulling the data from the custodian behind the scenes and then presenting it to the client, typically in a much more visual, and branded basis. And as clients generally have more that just one account, it shows them all their accounts in a single interface.
Incorporating a client portal into your practice becomes particularly helpful if you’re using more than one custodian, which a lot of larger RIAs eventually have.
If multi-custodial, it can be a bit unruly looking to have multiple custodian account login links on the RIA’s website. Instead, if you have a client portal, all clients log in and have the same experience regardless of which custodian holds their assets behind the scenes.
But again, for safeguarding reasons, because unfortunately there are bad apples in the world, the client can always verify for themselves information about their account by going directly to the custodian. However, typically for the client’s ease and branding purpose, and RIA guides them to a client portal to utilize instead.
CRM
While not an exhaustive list, but the final feature of a portfolio management tool I’ll mention is that more and more of these portfolio management tools are also incorporating a CRM into them.
Whether they’ve built a CRM on their own, or they’ve acquired a 3rd party CRM to integrate in, I think we’re leading to a point where all portfolio management tools will have some sort of CRM as part of their tool.
Now, you still have the choice as to whether to use their CRM function, or whether to use a 3rd party CRM. There are pros and cons to both approaches. But I think we will reach a point where all portfolio management tools at least have the option.
I started this episode by saying there are three main pieces to a tech stack. It might evolve to the point where there are two main pieces, because CRM has become so built into portfolio management tools that maybe that’s where the future is going. And who knows, it could be the case with financial planning tools as well one day.
So those are some of the main features of a portfolio management tool.
I’ll now leave you with some final thoughts on this topic.
For starters, if you are building your own tech stack and if you need a portfolio management tool, again, there are some custodial solutions where the client fee billing is built into the custodial offer, and the client portal is built in, the performance reporting features are built in, the trading is built in.
There are reasons you might prefer to have a custodian that includes that as part of their offering. So, before you try to pick a portfolio management tool, you generally want to pick your custodian first. That’s arguably a much bigger, longer term decision, and you want to get that correct.
You pick your custodian, then you back into the technology needed. But you’ll want to be mindful of how technology can/should impact your custodian selection.
A big part of what I do is help advisors and teams understand the available custodians, how they differ, etc. I’m happy to have that conversation with you as well.
If you end up needing a portfolio management tool, be aware it is by far the most expensive part of a tech stack. It is far more expensive than a CRM, or a financial planning tool, etc.
Choosing which portfolio management tool to use is hence a big decision. It is something you will want to put a lot of thought and due diligence into. Which I can help you figure that out as well. But just know it’s the most expensive piece. It is a big decision in this process.
Related, these tools continue to evolve with features you can use with your team members, use with your clients. But don’t default to assuming that the fanciest tool, or the tool with the most features is necessarily the best for you.
For starters, that’s because the fanciest tool might also be the most expensive, so that’s maybe not necessarily the best fit for you.
But even if you took price out of it, you need to look at it and say… “Let me understand all of the features of this tool, but realistically speaking how many of those am I actually going to implement into my practice?”
I don’t have the stats – I’m sure the portfolio management tools themselves do – but of all the features of a particular portfolio management tool, what percent of the features are used by a typical RIA?
I would even venture to guess it’s 50%, if not lower, because there have been so many features built. And sometimes those features are built because a subset of RIAs ask for those features, and with enough demand, the portfolio management tool spends the resources to build it. But there are other RIAs who might not have any interest in those features.
So long-winded way of saying don’t default to, and assume that the portfolio management tool with the most features is necessarily going to be best for you. You want to understand what features they offer, and then consider which of those features you’re likely to actually use. And only pay for a tool where you’ll get the most value for the cost.
Another thought, there’s long been a misconception, and at one time it was accurate, that the technology in the RIA space is inferior to the wirehouse space.
Now, if you go back 20, 25+ years ago, that was correct. The wirehouse technology was better than what was available in the RIA space.
A large part of why that was the case is it cost a lot of money and resources to develop good technology and a single wirehouse that developed their own technology had a bigger pool of users, their advisors, to spread the cost across.
They had more users than any one standalone tool trying to support RIAs had. And so when the RIA tools didn’t have as many customers, they couldn’t reinvest as much back into the platform and arguably they weren’t able to keep up.
That has now completely flip-flopped because of the evolution of the RIA technology space. There are now standalone RIA tools – portfolio management tools being an example – that have far more users (advisors) than any one wirehouse has total advisors to spread the cost across. Sometimes a magnitude more.
And so now, when you look at what’s available in the RIA space, the technology is not only better, but you have many more options to choose from of what technology you want to use. Like I said, there are hundreds of fintech solutions now available to choose from.
Now you might not want to entertain using all hundreds, but when you’re in the RIA space, you at least have the flexibility to. If a tool is available that will make your practice more efficient, or enable you to provide more value for your clients, and you want to use it, you simply can.
Now there are logistical and cost considerations, but if you’re in the traditional W2 wirehouse space, you don’t get to go and just use whatever technology you want. You either must use what they provide, or if there are tools you wish they would add or incorporate, all you can do is ask and pray and sit back and complain and hope that one day they build it. Which they may or may not.
Meanwhile, your competition in the independent space, the RIA space, is using it today.
So, don’t listen to anyone that says the technology is not as good in the RIA space as it is in the wirehouse space. It’s now the exact opposite of that.
The final thing I say is, don’t get intimidated by any of this.
I know I’m talking about how there are different custodians, and different approaches to technology, and different tools to use as part of a tech stack. But don’t be intimidated by that. That’s a large part of what I help advisors and teams with is. What custodian to use, what technology to use, etc.
There is a process for how to make all these decisions. You just need to lean on someone that knows the process, that has done the process hundreds of times, and can help walk you through the same process as well.
Like I said at the top, my name is Brad Wales with Transition To RIA. Understanding what a portfolio management tool is just one example of what I help advisors and teams with. I’m happy to have that conversation with you as well.
First things first, head to TransitionToRIA.com where you’ll find all the resources we make available from this entire series in video format, podcast format. There are articles, there are whitepapers.
At the top of every page of the website is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me, whether you want to talk about today’s topic or anything else RIA related. I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
And with that, I hope you found value on today’s episode, and I’ll see you on the next one.
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