3 Operational Risk Factors Creating Liabilities for RIAs


Our From the Desk of the COO series features stories, strategies and solutions from GeoWealth’s Chief Operating Officer, Jack HannahThis ongoing series will provide insights for those working in, or heading up, back and middle offices. Enjoy these views from our resident Operations Guru, Jack!

Jack, what are the greatest operational risk factors facing RIA firms?

In my time both working at an RIA firm and serving them from my current seat as COO at GeoWealth, I’ve seen several factors cause more costly liabilities than any other process breakdown or business misstep. Let's run through the list...

Trade errors. It’s been my experience that most RIAs are not trade experts by nature. Most know how to build or pick models for their clients, but the actual trading can come with a huge amount of risk. There are mistakes I see RIAs make too often, like trading the first minute the market opens, selling positions in the final moments before the market closes, or sending in market orders on thinly-traded ETFs that need to be bought or sold using  limit orders or other special trade instructions.

Trade errors that are going to cost an RIA serious time – and real cash – to correct are as easy to make as fat-fingering an extra zero, buying instead of selling, or buying something for the wrong account. Without reliable systems in place to prevent these errors, trading can create serious liabilities for an RIA firm.

Not only does GeoWealth have a team with deep trading experience, we’re also an RIA just like our clients, meaning we’re held to the same fiduciary obligations they are. We’re legally obligated to follow Best Execution trading practices, and we can do so on behalf of our RIA clients to eliminate the operational risk factors that trading can create.  Our knowledgeable trading team, paired with our aligned interests, mean that we work seamlessly with advisors, who input their trading instructions via our Service Center. The Service Center is a command center within our platform, where advisors can input their trade instructions and track real-time progress as our trading team completes requests.

Personnel. From a business continuity standpoint, losing a key employee is a major operational risk factor for an RIA. Imagine you have one employee doing trading, billing, and quarterly performance reports – which is pretty common for leaner firms – and this person takes a two-week vacation, goes on parental leave for a couple months, or can no longer work. How does your business continue to run without a body in that seat? 

Another scenario that I’ve seen play out more times than I can count (which tends to be even more costly) is when a firm hires someone expensive, then spends months training them to a point where they’re adding value, and then that person takes their skillset and moves on to a new firm. Hiring, training, and replacing employees is incredibly expensive and time-consuming. 

By outsourcing operations functions, an RIA can meaningfully reduce many of those personnel risks. GeoWealth has built a bench of subject matter experts who know billing, who know reporting, who’ve forgotten more about trading than many RIAs will ever know. And because our platform is flexible, we can act as an extension of an RIAs in-house middle- or back-office team to shore up confidence in the continuity of their operations, or take on their entire operational spectrum if desired.

Investment Management. For leaner firms – especially those without a CFA on staff – doing 100% of investment management can open up a number of liabilities. If advisors are building models, what’s their experience? What’s their track record? How happy are their clients? A firm needs to feel confident they have the requisite expertise and experience building those programs, establishing those frameworks, and providing ongoing due diligence and oversight.

There are plenty of ways to bolster your in-house investment management teams or systems via outsourced platforms like a TAMP or via third-party providers like an OCIO.

GeoWealth helps advisors whether they use third-party models, develop their own models, or use some combination of both. When firms plug into GeoWealth, they have access to a vast library of models available directly on our platform, which have been vetted through initial due diligence and receive ongoing monitoring. Alternatively, they can simply consult with us; we can provide tools and support as they continue building their own investment programs, thus alleviating the risks of doing so entirely in-house.

Creating Operational Assets for RIAs. Let’s quickly recap here on the ways RIAs can best position their ops departments to avoid these common issues. First, ensure you have systems in place to reduce the likelihood of trade errors, but also make sure you have a standardized process for remediating trade errors when they do happen. Second, be strategic about staffing so you’re not left in the lurch if your key trading or operations personnel ends up departing the firm, even if for just a short period of time. And finally, ensure that the teams handling investment management have the right credentials and experience to manage such a major task, and if not, find the right support for them outside your firm, whether its via a TAMP or OCIO solution. 

Until next time! Thanks,


P.S. Got questions? Want to chat through your current operations headaches? Hit me up at jack.hannah@geowealth.com.





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