RIA Learns the Ropes of Asset Management

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  • November 02, 2015

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Three years ago, Massachusetts-based RIA First National, and External IT client, added an asset management unit to its $375 million wealth management business. With a little more than $1 million in out-of-pocket assets to get the firm’s tactical ETF strategy off the ground, First National has since grown to oversee more than $13.9 million in total client assets.

First National President Michael Hebert tells Money Management Executive that while the firm is small and also new to fund management and its newly adopted strategy, it’s goal in asset management is simple: “expand.” Since launching, Hebert touts the unit’s three-year track record as well as recognition from Morningstar for its ETF strategies.

Developing a plan for potential security breaches, communicating with remote compliance officers and weighing options for integrating back-end tech tools are just a few of the issues that Hebert says are at the forefront of their middle- and back-office discussions.

Can you discuss your firm’s newly launched asset management sector?

Our asset management is small, only $13 million under management right now. It’s about three years old and it’s a tactical ETF strategy that’s a little bit different than other things in the space because it uses macro-economic factors instead of technical indicators. The math looked great behind the strategy and before we rolled it out to clients we just wanted to put our own money into it first and develop a track record and we’ve done that now.

We have a three-year track record, and in 2014 we had the top three managed ETF strategies in the Morningstar universe, which was great. We’re just looking now to see how we position that to existing clients, outside clients and institutions that might be interested in that. It’s just a very small piece of the overall puzzle.

When did the asset management business start getting traction?

We’re starting to take outside assets this year. So it has grown from about $1 million in assets, which was mostly our money, to now about $13.9 million. And we have some advisors who use it as their main strategy in their portfolios.

We’ve done some due diligence on launching it as a mutual fund, but the economics really speak to developing the strategy as a separately managed account first, and once we get to probably about $100 million in assets, then it will make sense to economically roll it out as a mutual fund.

As a small firm, what have been some of your biggest challenges?

The biggest is getting to a critical amount of assets so that you can generate enough revenue from that space to expand. It’s kind of a chicken and egg problem, you know – do you build out the marketing and operations side of it? At the same time, do you build up the operations first and how long do you have to hold on and wait and underwrite that until you have enough assets to make it sustainable and profitable?

We’re growing by selective marketing and word-of-mouth, but we could really benefit from having a full-time marketer of the strategy, and it’s really how do we find the right person to do that, how do we compensate them and what is their budget going forward and are they going to be able to raise enough assets to make it profitable within the next 12, 24 or 36 months? That’s the big unknown for us, being a wealth manager getting into the asset management space.

What types of issues as a smaller firm have you had with costs?

You’ve got fixed costs when you bring on someone in the operations side to run the portfolio, or to service the new accounts that are going to be open when you develop a new relationship (we’ve got some fixed costs there and they’re not low – it’s really labor costs more than anything).

The same on the marketing side: although the marketers are paid more based on production of what they’re doing – so if you pay a market to do some production and they’re not bringing it in it’s great, but if it’s not coming in as quickly as you want and you’ve brought in or committed some assets to the operations or portfolio management side then it could be a while before you realize some return on that.

I think that’s the case with any asset manager. Until you get a critical amount of assets, you’re kind of underwriting the cost of the venture. But that’s why it’s a high-risk, high-reward type of thing.

What have been some of your biggest compliance challenges in setting up the asset management business?

The two advisors that are running the strategy are not in our branch office. First of all, one of them is on Cape Cod, which is close enough – only about an hour drive away.

But the other advisor is down in Venice, Fla. so we need a collaborative effort to be able to run the strategy effectively. And we’ve been able to do that with the use of cloud-based resources.

What were you looking for as a firm when selecting a cloud service?

The most important thing was the ability to adapt to the systems that were already in place. Our CRM system is juncture, our portfolio management system is Portfolio Center, we use Tamarac Rebalancer and a number of different apps and systems.

We needed to make sure whatever cloud provider we went with would not only be able to host the applications and the data that we needed hosted, but that they had some familiarity with them too, because Juncture is not a CRM system that’s used outside of the financial advisory space that I know of, so it’s kind of unique, I think, to our industry.

To work with a cloud provider that had some experience with Juncture, knew how their SQL database was structured, how it integrated with Outlook and Portfolio Center and the other programs that it integrates with was absolutely critical to us.

Were there security concerns that the firm wanted to address?

We got to the point where we were running an Exchange Server in our office, we were running a portfolio center SQL database in our office, a Junxure SQL database in our office and backing those up locally as well as to the cloud every night and we were concerned on a number of fronts.

What if somebody took off with a server? It’s a huge data breach that we have got to worry about. What happens if anything ever happens to the office; flood, fire or whatever, or one day if the server decides not to wake up and cooperate with us? How long would we be down before some of the data backups were available to be restored?

When we backed up to the cloud, the SQL databases were so large that if we wanted to do a full test restore it would probably have been about three days and considerable cost to have the cloud-based database downloaded to an external hard drive and shipped to us and then uploaded here locally, which is what would have happened, rather than transferring it over on the Internet.

So we had some safety backup issues that were a concern, and data security issues that were a concern, and we tested them to the best of our abilities with some of our local backups. But we never really were able to fully test the cloud based backup.

One of the nice things about our provider External IT, is at least with our level of backup, we have a running 30-day backup of all of our systems and then there’s separate external backup that they do and quite frankly we’ve had to use it once, not the external but the running 30-day.

Has the cloud backup been tested?

We got some bad data from one of our custodians and upgraded our portfolio management system and realized two days later we had bad data and all the names of the clients had been changed.

It just took a call and about two hours [External IT] was able to reset the database back to 5 p.m. the night before we go the bad data download, which was huge. To be able to back in time within the last 30 days is huge, and to be able to do it within just a couple of hours was even bigger.

How useful was the cloud during all of the snow Boston had last winter?

We’ve had snow issues, not necessarily for the backup, but for the cloud-based access to all of our computers.

Boston had a record setting snowfall this past winter and my partner and I both have kids in school, so when there was significant snow and they canceled school for one or two days, we were often forced to work from home.

To be able to access what we would normally at the office is just terrific. We don’t lose any productivity at all. As long as we have power and an Internet connection at home we can work just like we are here at the office.

How does your firm approach and handle compliance issues?

We work with an outside compliance advisor and we lean on them a lot, particularly in the asset management piece because it’s new to us.

In terms of if we’re going to send out a letter to a number of prospects to potentially use a new separately managed account strategy, and get it approved before it goes out, some of the things you can show around performance, because in the wealth management space we don’t ever talk about performance relative to client portfolios because each of our portfolios is different and unique.

In our asset management space, it’s one of three portfolios and everybody’s got the same performance if they rein one of those threee portfolios. Just the difference between how we normally operate in wealth management and the new asset management arm, the terminology is a little bit different because you need to be able to show performance and make sure you have got all the proper disclosures so when you do show that, you don’t get into an F Squared-type of situation. (The now bankrupt asset manager that admitted at the end of 2014 to SEC charges of fraudulent marketing.)

When you have an incident like what happened to F-Squared, when you talk to people about tactical they say that sounds like F-Squared and they don’t want to have anything to do with it. That has soured the space, but we still think the benefits of tactical are huge in an otherwise diversified portfolio.

We think it really is able to hedge some of that tail risk. But it also allows you to participate in the upside of the market. We think the tactical is still a good place to be.