The Best Offense Is A Good Defense

September 9, 2016

The Best Offense Is A Good Defense

The Best Offense Is A Good Defense

How do you escape East Germany? You do it with planning.

In 1978 two families living in the East German town on Possneck decided to escape the shackles of the Soviet-controlled land. Poverty and despair were the unifying characteristic of the people. Crossing the border was dangerous. They called this region the "death-zone." People had been killed on the spot for escape attempts. How did the two families do it? They got their hands on nine hundred square meters of fabric and a gas burner. They built a hot air balloon and flew to West Germany.

While the escape happened overnight the planning didn't. More than a year was devoted to planning and testing with at least four failed attempts.

They succeeded because they had a plan.

READ:"Harrowing Flight From East Germany" (Washington Post by Michael Getler, September 28, 1979) 

Today the world is more complicated. A good plan today is better than a perfect plan tomorrow. If you put together a good contingency plan and an emergency won't feel like a disaster. Financial advisors can heed this advice with a simple review of four key areas. Let's take a look.

SEC Exam

It's the surprise party you don't want to attend.

Or perhaps a more fitting analogy is this: it's the lottery you don't want to win. An estimated 10% of US investment advisors will hear the SEC ring their doorbell this year. While the real challenge will be serving their requests make sure you have some overlap. When your time and resources are devoted to fulfilling their list someone will need to cover the core competencies of your business. The process will likely take at least one week.

In planning for this eventuality pay particular attention to cyber security. This has been an area of fault for many companies. This also likely represents the most vulnerable aspect of your business. Consider using experts to help you periodically exercise a mock exam. Your shortcomings will immediately become clear. As a result the resolutions can be made in a more comfortable climate.

Stay organized and keep your operation built for speed. The examiners will not only expect accurate information to their queries but also brisk delivery. Slow responses raise eyebrows. Additionally, RIA Compliance Consultants recommend you, "Make a copy of every document provided to SEC examiners and notate the date, time, and SEC examiner that received such documents." If there are questions that arise after the process you'll want to be armed with information.

Key Employee Departure

It can happen. It does happen. It will happen. The best proactive solution here is to build some overlap into the operation. This is expensive and time consuming but it's the best way to be prepared if you can manage it. If this is not feasible, consider having key employees document some of the technical procedures they follow. Broad skills are much easier to replace. However, if you use an esoteric data management system you may discover that experts in the marketplace are rare. With a written record of critical command prompts and user inputs you'll have a guide to follow.

By fostering a more team-oriented workplace you'll enjoy the natural benefit of contingency planning. When people are encouraged to work together they will be less territorial around information and processes. Often employees make themselves indispensable not through strong work ethic but through a recalcitrant approach to sharing information.

The sobering truth is that nobody is irreplaceable. However, some positions take longer to replace than others. When you don't have coverage you feel forced to rush the hiring process, which only exacerbates the problem. Create a framework where transitions can be made smoothly. This can be developed through the support that comes with open lines of communication. If employees are comfortable discussing "bad news," like their decision to leave, they will be comfortable announcing this with ample time to handle the transition.

For those wishing to take more certain measures consider employee contracts. This is a more dramatic approach to the problem as it entails time, expense and often-difficult discussions. This is secondary in desirability to the previous options as it can leave the workforce feeling boxed in.

Technology Failure

Your world is financial management, not IT. This makes the challenges of managing IT solutions difficult. This is one problem that can be solved via outsourcing. Though sometime costly, outsourcing IT builds protection against the unexpected. Keeping IT under your own roof adds liability and distraction. The value to outsourcing is that you'll have the issues in the hands of professionals. This brings the benefit of an outside perspective that may be more cognizant of risks than you are.

When IT solutions are outsourced you also enjoy the benefits of an offsite contingency. This diversification of assets (in this case digital) only adds to security. If concerned about costs consider sharing the outsourcing plan with your insurance provider. This extra step may be seen as a risk management move. From the perspective of an insurance underwriter there is value to separating this entity from the core business.

Exercise caution in selecting an outsourced IT provider. If dissatisfied you'll find it difficult to pack up and go. The process of untangling yourself from a previous IT provider is always difficult.

US Department Of Labor Ruling

When the axe comes down it comes down fast. New and revised regulations will always be part of the equation. Embrace them; after all you'll be required to do so. In the end even the most onerous rulings will make your business stronger. The immediate problem is that enacting new provisions can be expensive. In extreme cases a business may even need to change their model to accommodate new costs associated with a ruling. This is a challenge.

The best way to combat this is to predict the rulings before they occur. This is not difficult as the rulings are often well publicized while they're still in play. In many cases you'll have at least a year before having to comply. This provides ample time to adjust. Don't wait until the ruling is final to discuss the next move. Keep up to date on the regulation changes and adjust ahead of time.

Adding It All Up

The number of risks facing an investment advisory company is incalculable. However, the number of risks likely to occur is much more manageable. Focus on these four and you'll thank yourself later. Risk management has a price tag but facing a risk unprepared has an even greater cost. Start now.



Elisabeth Miller

Milava Consulting

Telephone: (844) 464-5282


Elisabeth is a Managing Partner at Milava where she designs operations, technology, and marketing strategies to help financial firms run more efficiently. Milava is a consulting and outsourced services firm that specializes in providing practical strategies to help financial advisors run more effective businesses. With intelligent tools, Milava helps advisors grow successful firms in less time and with less effort. Elisabeth's expertise includes brand development, marketing execution, infrastructure design, process improvement, and technology integrations for financial advisory firms.

Elisabeth has provided marketing guidance for the development of a range of financial services firms, including large broker-dealers and independent RIAs. Her daily practice of speaking to a number of investment advisors gives her a unique perspective to help clients implement tactics that the best performing firms are utilizing. She closely aligns herself as a partner to each of Milava's clients to better understand their businesses and deliver custom fit solutions.  

Before joining Milava, Elisabeth focused on marketing strategy at Dimensional. During her time at the firm, Elisabeth lead initiatives across financial services reporting, performance analytics, and marketing. Elisabeth received a BBA in Finance from Texas A&M University and holds the CIPM designation from the CFA Institute.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.