"It's important to have state-of-the-art systems in place so that anyone looking at your firm perceives quality, even if your firm is very small."

Operations Can Spell Success or Failure

By John Bowen

Most financial advisors focus on marketing and sales to build trust. Even if you are successful and achieve a high level of growth, you will set yourself up for failure if your infrastructure is not prepared to handle expansion of your business. Mistakes in operations are noticed by clients and can undo otherwise successful marketing efforts.

The first step in building effective operations is to focus on the results you want, not the errors you are making. Starting with the new account process and continuing every time you have contact with your clients, you have an opportunity either to impress clients or lose them. It's your choice. Clients trust you with their life savings. If you can't provide an acceptable performance statement on a timely basis, they will naturally question your competency in other areas (as well they should).

Self-checking mechanisms can save you from the embarrassment of showing a client a report that's wrong. Great systems in your back office ensure the success of your front office. In designing systems, you must address each of your office procedures and make them appear seamless to your clients.

Your operational systems should appear to your clients as a swan on a beautifully sunny day effortlessly gliding across a tranquil lake. That is what your clients should see, even if the whole picture involves webbed feet scrambling frantically just below the surface of the water.

The most humbling experience for you as an advise comes at that moment of truth when you're with a client who has placed faith in you, and you present that client's paperwork at a meeting�and it's wrong! Now that's truly humbling. Develop systems so that this will not happen to you.

Common Errors

Common embarrassing mistakes include signatures that are missing and blanks that aren't filled in. Whether the paperwork goes smoothly or not depends largely on the custodian, but it also depends on your thorough understanding of the paperwork requirements. Always take the time to adequately prepare for meeting with a client. Use a highlighter to mark all the areas you need to fill in with information so you don't pass something by.

Don't go into the meeting full steam ahead only to later bother the client with some detail you should have taken care of up-front. It's better to be prepared than to be embarrassed later. Do a test run with each new custodian. Practice walking through the process of opening an account from A-Z for yourself (money doesn't have to be deposited; just open an account). Also, try filling out all the paperwork and learning all the potential mistakes on your own account.

With massive data coming in, it must be ensured that the information is coming in correctly. Every time a transaction takes place, the computer must record and reconcile it, whether it's a deposit, a distribution, a trade, a name change, an address change�whatever the detail is, no matter how large or small.

Data integrity helps in figuring out what to do in specific situations that arise and in establishing procedures. For example, what if a transaction hits an account and you don't recognize it? What if there is a split on a stock? What if there is a merger? What if a stock is coming in at a zero basis? How do you report this to your client? More importantly, how does your portfolio accounting software track these anomalies? How do you ensure that the stock doesn't drop into your system at a zero basis, which generates an incorrect tax report?

Put someone in charge of looking at all the information on a specific transaction and coming up with an analysis and solution. That person isolates the situation, learns and understands it thoroughly, then determines how it should be handled by the firm's portfolio management accounting system. This will help ensure that a transaction is ultimately reported correctly to the client. Your goal is to work with the custodian to ensure that a particular transaction is not going to "contaminate" your database, but rather will ultimately improve the database by being handled well.

Repeatable procedures can develop out of individualized solutions that work. We have clients with multiple accounts making up one larger portfolio. In calculating internal rates of return within that portfolio, it is important to determine a starting date of management. Rather than using the date money is received, we use the date that trading and billing actually began. We set it up so that we can easily look at each individual account or at the portfolio a whole. It's important to be consistent in the way an internal rate of return is calculated. Always keep the same pattern, never deviating, and you'll avoid one way of getting into trouble in an audit.

If your custodian makes a mistake or takes forever to get money into an account, the advisor is blamed. Advisors are thought of in the same light as the custodians they use. The company you keep, good or bad, is often how your clients judge you. Work only with the best�it is too costly not to.

As an advisor, cross-checking on your client's behalf is a large part of your compliance and fiduciary responsibility. As the quantity of clients and dollar magnitude of your business grows, your systems become even more crucial to the protection of not only your clients, but also your professional standing. You need to build in systems that will ensure you won't get blindsided by a bad trade that the custodian puts through or an incorrect commission charged.

The Transfer Process

Clients get concerned when their money is in transition from one financial institution to another for any period of time. Transfers are notoriously slow since most financial institutions are very reluctant to relinquish dollars. Create a transfer process that double-checks every transfer to make sure it happens correctly. Establish a close relationship with the custodian's transfer specialist and develop a tag-team spirit to ensure expediency and to "trap" any errors or blow-ups that may occur.

There are established systems of properly executing a transfer efficiently. One is the ACAT (Automated Customer Account Transfer) system that allows three to five days for execution of a transfer (or, at the very least, to have it online). Track every step of the way. You should know when each transfer is initiated, exactly what point in the process it's in, and when the last follow-up occurred with the broker-dealer or contra firm. If something blows up, you will know within the week. If the money is to go straight to the custodian, an advisor may not find out about a problem for two or three weeks.

It's important to have state-of-the-art systems in place so that anyone looking at your firm perceives quality, even if your firm is very small. There are many nuances and details with respect to transfers. For instance, if the transfer involves a partial account transfer or a proprietary fund, the ACAT system cannot be utilized. If there's a limited partnership or an asset that the custodian can't handle, the ACAT will reject the transfer and you will have to go back to your client with your tail between your legs.

Let your clients know up-front what can and cannot be transferred on a timely basis. Remember to manage their expectations before you manage their money. Transfer blowups typically happen within seven to 10 days of their initiation with the custodian so a week has been lost in the process. The client is not going to be happy and you're back at square one.

Work with a custodian closely to make sure your transfers are "clean" and that all the dollars you're asking for can come over within your custodian's parameters. Can the custodian handle X-Y-Z mutual fund? Can the custodian handle X-Y-Z limited partnership? Or does the client need to sell those holdings at the broker where his funds are currently residing?

On an ACAT transfer, if everything is clean, you're done within seven business days. Whereas in a non-ACAT transfer, the process normally takes 20-30 business days. If you must step out of the automated transfer process, make sure your client understands how long the transaction might take. With a normal brokerage account transfer, the process normally takes 20-30 days.

Make sure the client's assets are where you think they are and in a form that can be transferred from the existing financial institution to the target one. Send the transfer by certified mail, if it's going direct. Make sure your custodian sends the assets to the proper person at the contra broker. For direct rollovers from a client's 401(k) into an Individual Retirement Account, make sure the client received and completed all forms received from the employer to transfer the 401(k).

Explain the process in its entirety to the client. Manage expectations. Often the quickest way to transfer your client's total position at the brokerage house is to liquidate it. The transaction cost will most likely be higher than it would be if the new custodian handled it—but your client has saved 20 days.

Another big advantage with liquidating at the original brokerage house is that if the market runs up or down, you have access to the client's funds immediately. With an ACAT transfer, the funds are frozen until the process is complete. You can't start entering orders within that account and the broker's liability is potentially open. The client may be stuck in the middle, watching the market sink as his funds are in transition.

Managing Trades

Trading can be complicated and expensive to your business if not properly handled. Building a close alliance with your custodian can help smooth out the process. Your role as a fiduciary to the client is to get the best execution possible and to manage emotions. You do not want to violate that role or lose the trust of a client. You also don't want to blow it for yourself and run up costs due to trade errors.

A common mistake made by new advisors is being impatient. Be patient in selling for your client. A panic sale or emotional sale can be not only detrimental to your proceeds, but also to the overall price of the stock or bond in trading. When doing a block trade (more than 10,000 shares), you definitely should use your custodian's institutional brokers. Their job is to isolate what the market is, who's buying who's selling, and generally help you work the order in the best way. They can also help you set limits. For orders, make sure neither you nor your client rushes in and "blows out" a position without knowing the consequences.

Ensure that the transaction costs of the trade are beneficial to your client. When selling more than 5,000 shares, don't be afraid to negotiate with your custodian or institutional broker. They thrive on this type of business and it's easy for them. If you're not an expert, find one.

Reprinted from: FINANCIAL PLANNING