Outsourcing your Chief Investment Officer (CIO) role can be an advantageous move for independent broker-dealers. By doing so, you can tap into the resources and expertise of a qualified CIO without having to hire and manage someone in-house. This can save you time and money, while also ensuring that your technology needs are met.
If you’re like most RIAs or broker-dealer firms, finding and hiring a qualified Chief Investment Officer (CIO) may prove to be more difficult than you imagined. It can be tempting to just put the search on hold until the perfect candidate comes along, but this could be a costly mistake.
This article discusses the following:
- It’s not always easy being an independent broker-dealer
- Can you climb the independent broker-dealer rankings?
- The advantages of using an OCIO
- Let an outsourced CIO help you keep compliant
- How it benefits an independent contractor broker-dealer
The responsibility of managing clients’ portfolios, staying on top of industry regulations, and constantly strategizing to find opportunities for better returns can be daunting. Add in competition within the financial services arena, as many large firms seek the same client base, and it all becomes a recipe for headaches, at times.
To say the least, being an independent broker-dealer isn’t always a walk in the park. The same smaller-scale service model that your clients love can mean doing without the resources or expertise that larger corporate entities can afford to take for granted. At the same time, you may be juggling multiple responsibilities such as marketing, sales, record-keeping, and more—all while trying to provide exemplary customer service.
It takes real dedication and resilience for an accomplished broker-dealer to succeed independently in today’s competitive market. The role has recently become even more challenging due to tightening regulations and increased scrutiny. You’re probably aware, as well, that this is a direct result of recent economic trends, regulatory changes, and the need for greater transparency.
In fact, the regulatory environment in the industry today is constantly changing, requiring entities that operate in this space to be ever more precise and vigilant. Documentation of all business practices and operations is vital for staying compliant with the latest industry rules and regulations. Without it, broker-dealers can face hefty fines or even revocation of their license. Back in the day, you might have been able to fudge here or there, but not anymore.
The days of just winging it are over: Ad hoc attempts to remain compliant won’t cut it now. For continued success, establishing proactive processes for the creation and maintenance of records is essential. Proactively safeguarding against potential issues via thorough compliance measures—or hiring someone who can help you do it—can potentially ensure that you’re upholding the highest standards of integrity and avoiding costly penalties.
Although it is more challenging than ever to compete in today’s financial industry, it’s not impossible. Investing the right resources into your firm can still help you reach the top and potentially stay there. Knowing which trends are currently affecting the industry and staying ahead of them is key, as well.
These can play a major role in driving success, no matter where you are in relation to your competition’s rank. Even rising independent broker-dealers can eventually become industry leaders. Nobody said it would be easy, though. In fact, the age-old question remains “How?”
Well, you might get there faster with more hands on deck. There’s a lot to be said for good old-fashioned delegation, even in today’s fast-paced financial industry. However, this can sometimes present as many challenges as you originally sought to eliminate. For example, you could hire a wide-eyed, inexperienced newcomer. They tend to be cheaper to compensate, but there are also potential drawbacks that must be taken into account.
If the new kid is a fresh-out-of-college graduate with no street-level experience, they could lack knowledge or understanding when it comes to the latest regulations that must be adhered to. Additionally, they may not have the skills necessary for making the kinds of quick and accurate judgments that are essential to financial management.
An untrained advisor will likely require an extra amount of support, possibly making it difficult to handle multiple customers at once (which results in less efficient service, overall). Training them can be time-consuming, as well. It can also hurt your brokerage firm over the long term if it isn’t done 100% incorrectly. Finding the most suitable candidate or success and sustainable efficiency in a high-pressure environment can be like finding a needle in a haystack.
On the other hand, you could try recruiting an industry rock star. However, they may have grown used to working within a certain structure or setting, meaning they’re resistant to change or feedback (which can lead to frustration among your other employees). They never come cheap, either, so—it almost goes without saying that—you’re going to need deep pockets to land them.
At the same time, if the new hire is a name from industry headlines, there is always the chance of their success overshadowing any focus on your team approach and collective results. In fairness, he or she might not intend to be disruptive, at all.
Nevertheless, even rarer-quality team players eventually tire of laboring in an attention-getting coworker’s shadow. It’s unfortunate, but it happens almost every day. So, ultimately, you could wind up losing staff as a result of your attempt to expand the team.
Depending on the rock star’s status in the industry, they could generate more attention from regulatory bodies, as well. This might be another area in which they didn’t intend any harm, but trouble crashed the party, anyway. If that happens, it could mean potentially losing most (if not all) of the time you’d hired the new employee in order to recoup.
It would almost seem hopeless if there wasn’t another option worth considering.
Rather than bringing someone physically under the roof of your brick-and-mortar offices, you could opt to hire an outsourced chief investment officer (OCIO). There are multiple possible benefits, including the fact that you’d have no benefits or bonuses to pay (ever).
In a sense, hiring an OCIO can mean having your cake while eating it, too: A seasoned professional joins your team, but you don’t even have to provide a parking space. Regardless, they are on deck as necessary throughout the business week through Zoom, phone calls, and so on. You can list them on your website’s our-team page, as well.
Selecting an OCIO can mean that you won’t have to bear the cost of employing a full-time employee, including their salary and associated overhead such as vacation pay and payroll taxes. Additionally, hiring an outsourced CIO, meaning hiring an extensively-experienced advisor, can add a sounding board for potential asset management solutions.
If you’re selective, it can yield reliable guidance from a professional who understands how to evaluate and manage risk in multiple asset classes—as well as how to handle the necessary compliance requirements. Meanwhile, outsourcing your chief investment officer can be an extremely effective way to free up your day-to-day schedule.
By having a vetted fiduciary professional join your team, you can rest assured that somebody else is taking on the responsibility for sorting through the paperwork and then grinding out the details. This, in turn, can free up more time for you to focus on critical ideas and strategies to move the firm forward.
Outsourcing your broker-dealer firm’s CIO can also be a cost-effective way to maintain well-documented investments while you remain Reg-BI compliant. A solid candidate will have a deep understanding of the increasingly complex, ever-changing regulatory landscape. Leveraging their detailed documentation, you can have full transparency into all decisions made alongside experienced insights on buying opportunities, current market trends, and performance metrics.
The importance of these advantages almost can’t be overstated, where Reg-BI is concerned. Ever since the Securities and Exchange Commission (SEC) released the Regulation Best Interest Rule, the way broker-dealers engage with their clients has changed almost fundamentally. As a result, you must ensure that you follow every aspect to the letter.
Doing so allows you to protect yourself from liability claims that may arise from non-compliance. Knowing where the specifications differ from prior regulations and how best to comply when providing advice to investors helps safeguard you and your clients. Over the long term, it can also help you maintain more accountable relationships, should questions arise, as well.
Staying Reg-BI-compliant isn’t just an issue of preparing and filing timely documentation: you need to verify your data quality, at the same time. In other words, in order to remain fully compliant, firms must confirm the accuracy of the records their automation systems generate. Reliable information isn’t just integral for investors and other stakeholders to make informed decisions.
The overarching goal of Reg-BI is investor protection, so meeting the standards for data quality further demonstrates your compliance with both clients and the SEC. Put another way, provably complying with those legal and ethical obligations by ensuring the accuracy and completeness of your documentation demonstrates your trustworthiness to the public.
This is why an outsourced chief investment officer who thoroughly understands Reg-BI can become an indispensable member of your team and an asset to your firm.
Again, hiring an OCIO can free up time for you and your staff. By having an experienced, third-party advisor handling compliance-related data, you can concentrate on delivering quality service and advice to your clients. Especially since bear markets tend to make investors antsy—and at times, eager to fire their advisor—extra relationship-nurturing time may mean the difference between success and going under.
At the same time, you might actually be able to start engaging prospects again. If you’ve found yourself wondering how you could possibly grow your client list, keep the home fires burning with existing clients, and take care of back-office compliance work, the answer might be a four-letter word: O-C-I-O.
Imagine the ways in which you might serve your clients more attentively while growing your business model! Delegating to your OCIO could even facilitate more autonomy for focusing on services customized to each client’s individual. You could use some of the time to improve your processes, possibly boosting overall efficiency, as well.
Meanwhile, you might discover more time for pursuing opportunities in other areas, such as marketing, client events, and succession planning. It’s worth the time to be choosy because outsourcing the right CIO could be an opportunity to tap into a larger pool of experienced insight without committing long-term resources or increasing your full-time staff.
There’s something to be said for adding—not a possibly temperamental rock star, but—an accredited industry professional to your team. Engaging an OCIO who’s a Chartered Financial Analyst® (CFA), for instance, can bring instant prestige to your firm. Remember when I mentioned that you can list them on your our-team page?
If their bio adds significant horsepower in terms of both accreditation and experience, people tend to notice. Having an experienced CFA® at your disposal can potentially enhance your credibility. To say the least, when market instability makes some investors wary enough to research you more deeply before reaching out, this can only help.
That kind of plug-and-play prestige boost doesn’t grow on trees. It’s only one of the many areas in which selecting a well-qualified OCIO can probably solve your CIO-hiring issues and help streamline your overall operations. You might say it’s an investment in increased credibility, industry-experienced insights, and Reg-BI-compliant documentation that doesn’t cost nearly as much as hiring a full-time executive.
When you’re ready to learn more, schedule an appointment with Cornerstone Portfolio Research. We’re custodian-neutral, so you never have to worry about switching custodians; we’ll work with yours. All of our services get white-labeled with the name of your independent broker-dealer or RIA, as well.
Cornerstone Portfolio Research (“Cornerstone”) is an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. This publication should not be construed by any consumer or prospective client as Cornerstone’s solicitation or attempt to effect transactions in securities, or the rendering of personalized investment advice over the Internet.
The statements in this publication are the opinion of Cornerstone regarding Outsourced Chief Investment Officer (“OCIO”) services. These are not personalized recommendations and you should consider your own criteria when choosing an OCIO.
A copy of Cornerstone’s current written disclosure statement as set forth on Form ADV, discussing Cornerstone’s business operations, services, and fees is available from Cornerstone upon written request. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Cornerstone or the professional advisors of your choosing.