As financial industry regulations and compliance become more complicated, more advisors are looking for help from third parties to provide technology and back office support.
But the outsourcing support these third-party vendors offer—and the simplification of doing daily tasks that they can provide—are only valuable if it is accurate and secure, Michael Berman, CEO of Ncontracts, a provider of regulation technology solutions for wealth management firms, said in an interview.
Hiring the wrong vendors for technology and support can be dangerous and costly if the firm does not do its homework, Berman said.
“You can outsource the work, but you cannot outsource the responsibility,” he said.
For instance, last year, Comerica Bank’s wealth management division switched platforms only to have the new platform cause transaction errors for trust clients, The Wall Street Journal reported at the time.
Some transactions went through multiple times, while others did not go through at all. Comerica reported that any money that could not be tracked down would have to be written off and that amount has reached $500,000 so far.
Similar problems can face other financial companies, large and small, if the vendors are not thoroughly vetted, Berman said. Finding trustworthy vendors to outsource back office work to is crucial to financial advisors and institutions, he added.
Ninety-eight percent of investment advisors said outsourcing enables them to deliver better services to clients, according to “The Impact of Outsourcing,” a study conducted in 2021 for AssetMark by independent research firm 8 Acre Perspective.
At the same time, 44% of investment clients switched advisors for ones that offered a better digital experience, according to a study by the Thought Lab Group, an economic research group.
Hiring an unqualified company can can leave firms’ open to data breaches; can cause service disruptions, and can even lose a firm clients, Berman said.
To prevent those types of problems, financial firms need to have intelligent contract management, customizable risk controls, cyber monitoring, and workflow management capabilities, Ncontracts said.
“There has been a huge uptick in firms looking for third party risk management because wealth management firms are being targeted by unscrupulous vendors. These sophisticated people attack firms’ clients, which probably means the firm is going to lose those clients,” Berman said.
Firms also need to know vendors can continue to provide service and keep the firm operational in the case of natural disasters, Berman noted.
“Threats come in a lot of variations and they are getting more prolific,” he added.
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