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  • by Justin Di Filippo
  • Director, iRebal Product Management, TD Ameritrade Institutional

Creating Tomorrow’s Experience by Evolving Today’s Processes

It’s not uncommon for a firm to put the advisor at the core of its portfolio management and investment operations processes in a decentralized, autonomous role. Often, advisors start as the primary stakeholders for client relationships. This includes knowing all the particulars of the client’s situation, and taking responsibility for investment selection and timing of trading decisions.

As your RIA practice continues to grow, challenges will arise with this structure that may be difficult to overcome –lack of recordkeeping across advisors could increase compliance risk. Clients could perceive their relationship to be with their advisor and not with your firm–potentially eroding your firm’s enterprise value.

The evolution of an RIA’s investment operations processes typically passes through two stages, with many firms working toward the ultimate objective for full centralization. The beauty is that rebalancing technology provides the framework to structure your process for maximum efficiencies. Implementing rebalancing technology can provide firms a path to evolve into a lean, forward-looking business.

The path is a continuum, starting out decentralized (also referred to as “distributed”), passing through a hybrid approach, and finally resulting in a centralized investment function.

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1. Decentralized—The advisor fulfills the role of relationship manager, portfolio manager, and trader. This structure often exists in larger firms that may have started as a partnership of several advisors who still operate autonomously, each responsible for knowing the particulars of the client situation, investment selection, and timing of trading decisions.

The benefit:

• Advisors may know all the intricacies of a client’s situation

The challenge:

• Advisors may focus primarily on servicing clients rather than cultivating new relationships to support business growth, and be reluctant to relinquish control of the investment/trading function.
• Firms may experience inconsistency in investment decisions across their client base.

The solution:

• Show the advisors the value in building new relationships and growing the business as demonstrated by their success. As the business grows, the importance of creating consistency among client portfolios will become even more paramount.

2. Hybrid approach—Part distributed and part centralized, the firm has a few teams or “pods;” each include an advisor, an administrator, and a customer care rep. The hybrid approach centralizes trading; however each pod is responsible for submitting rebalances, editing, and approving trades.

The benefits:

• It allows a team flexibility and diversity of function to take on other projects if the work the pod does requires less than 100% of their time.
• Associates are exposed to different functions, creating an element of natural cross-training—often enabling associates to cover for each other.

The challenge:

• What may trigger trade activity for one advisor might not trigger trade activity for another. Each pod develops a distinct investment culture that may fuel an inconsistency in investment management approach.

The solution:

• Routine calls between the advisor, the portfolio manager, and trader within the investment management function can keep everyone connected and working in the best interest of the client.

3. Centralized investment function—This structure is typically the most efficient as responsibility for rebalancing and trading exists in a single enterprise investment team. Transitioning this function to a team of a few people to manage models, rebalance, approve, and place orders helps firms evolve from the distributed approach into a centralized function.

The benefits:

• More consistency for client accounts across the enterprise as decisions are centralized in the investment and trading team
• Increased efficiency. Investment associates can manage 300 to 400 relationships, performing all rebalancing and trading, bringing remarkable scale
• Advisors can now focus on value-added activities, such as strengthening relationships, driving referrals, and business building
• Increased enterprise value as the client relationship is no longer specific to a particular advisor, but the overall firm

The challenge:

• Carving out dedicated time to make the transition

The solution:

• Share the vision and value of a centralized investment function with your teams, and put it at the top of your priority list to make it a focus this year.

What approach is your firm using and do you have plans to change it?

If you would like to learn more about how to make rebalancing technology a strategic move for your firm, download the “Optimizing Your Investment Management Processes” perspective paper.

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