Four Challenges in Managing Oversight of Your Rep as PM Program

Published by Marshall Smith, CIPM, Chief Product Officer, Products
May 25th, 2018

With the shift towards asset fee-based compensation for investment management, many brokers and financial advisors are registering their own portfolio strategies in a representative as portfolio manager program (Rep as PM).  In these models, an advisor builds their own managed strategies, often creating a group of risk-based model portfolios, which charge a percentage of the assets as the management fee vs. a commission or other one-time fee. These advisors perform their own research, due diligence, and security selection using tools made available by their broker-dealer.  The broker-dealer is responsible for surveillance and oversight of these advisors as well as the portfolio performance, risk, and allocation.  The home office of the broker-dealer generally has a team that is responsible for establishing acceptable ranges for asset allocation, return, and risk to ensure the end investor is protected.  With the stage set, here are four major challenges to accomplishing this oversight duty:

  1. Multiple Sources of Data. Many broker-dealers are challenged by needing to pull the necessary data to perform their oversight out of multiple systems and into another system (or more likely spreadsheets) to perform their oversight.  Portfolio Management, Performance, Compliance, CRM, etc. all have to be extracted, manipulated, calculated, and merged. 
  2. Timeliness. Building on the first challenge, the timing required to pull data from each system (and then re-pull it when updates are made) is time-consuming, manual, and often results in compound delays that postpone the oversight process weeks or even months after a quarter or year-end.  These delays extend the timeline until mitigation steps can be taken by the home office to resolve any outlier situations and risk is created for the broker-dealer to fulfill its fiduciary obligation.
  3. Lack of automated outlier rules. Regulators are looking for broker-dealer home offices to have automated, repeatable, and tamper-proof outlier processes.  What are the acceptable performance dispersion, acceptable risk dispersion, acceptable turnover (low or high), or acceptable asset allocation against model?  The definition of an outlier needs to be defined and an automated process is needed to source these outliers in order to perform necessary mitigation steps.
  4. Mitigation Workflow Is Manually Tracked (In Yet Another System). If you have pulled data from multiple systems, merged it together in a timely fashion, and applied your automated outlier rules to find accounts needing oversight, your last challenge is then tracking your workflow to research the issue, tracking the communication with the advisor managing the portfolio, and then reporting on the various actions, communications, and documentation supporting the oversight.  Often this is done in another application or possibly even manually in a CRM or spreadsheet. 

When confronted with these challenges, First Rate chose to develop a single solution.  This is how ExecView was born.  ExecView provides a broker-dealer oversight team with a single tool to calculate the analytics needed, automate the identification of an outlier, give risk and asset allocation perspective within an agreed upon SLA (typically 5-10BD at month end), and provide a workflow solution to track the mitigation steps and documentation to support a regulator’s audits.  To see ExecView in action, contact me at Msmith@FirstRate.com.

 

About the Author: Marshall Smith CIPM, Chief Product Officer, has been with First Rate since 2006. You can follow Marshall on Twitter @1stRateMarshall, or connect via LinkedIn.

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