3 Great Reasons for RIAs to Centralize Investment Management and Trading

3 Great Reasons for RIAs to Centralize Investment Management and Trading

By Co-Authors: Craig Iskowitz, CEO Ezra Group and Brian Ross, CEO Flyer

“It’s not the most powerful animal that survives. It’s the most efficient.”

— Georges St-Pierre


There are over 14,000 SEC-registered RIAs in the country, up almost 17% from 12,000 in 2016.  The majority of the increase came from solo advisors, many of whom are running lifestyle practices where the return on investment (ROI) is defined simply by whether the gross profit is enough to cover their family’s living expenses.

As successful RIAs grow and bring on additional advisors, measuring ROI shifts over time to be driven by productivity, as industry guru Michael Kitces noted:

“And for the largest advisory firms, a key measure of productivity becomes revenue per employee, the most straightforward way to quantify, in the aggregate, how much staff it takes across the enterprise to service each segment of the firm’s clients and revenue.”

Increasing revenue per employee is a critical success factor for a growing RIA firm. This is especially true since 89% of RIAs surveyed by Fidelity expect their fees to stay flat or decrease in the next few years.

One of the most effective improvements that build scale is centralizing a firm’s investment management and trading functions. The reasons for this are numerous: increased operational efficiency, simplified deployment of enhanced functionality and improved block trading.

Increased Operational Efficiency

While some multi-office RIAs grew to their current size organically, many others grow through mergers and acquisitions that can bring together firms with different technology stacks and business processes. If these disparate internal workings aren’t consolidated, it forces advisors and staff to work across multiple account interfaces, suffer through fragmented workflows, and deal with order staging problems that are inherent when utilizing separate trading platforms.

Centralizing and consolidating trading systems also reduces the burden on staff to maintain their expertise to support different technology. 32% of RIAs surveyed by Fidelity said that staying up to date on the latest technologies was one of their top technology challenges they face after the COVID-19 crisis passes.

When portfolio management and trading are centralized, advisors are no longer forced to swivel-chair between different trading systems or worse, re-key critical information, helping save time and reduce errors. In fact, there are numerous benefits to taking advisors out of the trading loop such as fewer trade errors, improved compliance, better auditing, and less complex technology infrastructure.

Consolidating the firm’s infrastructure will lower overall support costs and reduce the time required to integrate new technology.  While Moore’s Law may have fallen by the wayside, one rule of thumb for CIOs is to upgrade core systems at least every five years. Avoiding overly complex tech frameworks with duplicative applications will make this easier.

Efficiencies are also gained by centralizing operations as critical processes can be handled by a core team of trained specialists rather than individual advisors.  This team will be better trained on technologies and gain more experience since they will be using the tools every day across all of the firm’s accounts. The central portfolio management and trading team will deliver a faster ROI on new technology due to the scale and volume of activity that will be concentrated on them.

Many RIAs have a separate trading application for each custodian while others have separate technology for each asset class such as equities, fixed income and options where each has their own processes and support requirements. It makes sense for RIAs to collapse these multiple trading applications and silos onto a common platform.

Establish Trading Windows

Once a centralized portfolio management and trading team is established and multiple trading applications are collapsed onto a single platform, the next step is setting up daily trading windows to better manage the flow of orders.

There is a myriad of regular events that require an account to be traded. Starting with new account funding, to other deposits, withdrawals, terminations and market movements that trigger rebalancing, all of these activities require trading in one or more accounts.

If each advisor is responsible for portfolio management of their own book, they often submit their trades piecemeal throughout the day as requests are received from clients. However, this is inefficient as the ability of each advisor to process trades is not equal, leading to delays and potential manual errors.

TD Ameritrade recommends that firms consider establishing trading windows with two or more cutoffs during the day so that trades staged for execution are submitted together. This arrangement offers benefits such as simplified compliance checks and standardized trading with more stable average pricing.

Establishing central trading windows also decreases the probability of trade errors by minimizing rushed trading that often occurs immediately after market open or before market close.  It also allows advisors to concentrate on offering value-added activities as well as what they’re good at—relationship building.


Enhance Functionality & Services Offered

Not only does centralizing investment management processes increase operational efficiency, it unlocks advanced functionality and services offerings that these RIAs didn’t have access to previously.

Centralization reduces friction when deploying options strategies, which is critical when the market is moving rapidly. Writing call and/or put contracts or adding fixed income assets to reduce portfolio risk can be executed across large account groups as opposed to singly when being handled by advisors.

A central operations staff is in a position to monitor the firm’s options positions and quickly close them or roll them into a new strike price position or expiration date, according to Robb Baldwin, CEO of custodian TradePMR. “Advisors today are regularly challenged by their clients to prove their worth. Navigating volatility with [option] spread strategies is something advisors can take advantage of today,” Baldwin noted, “and in my opinion, managing an options portfolio can demonstrate an advisor’s skills and differentiate their value.”

Advantages for Block Trading

In March 2020, the number of block trades with orders of over 25,000 shares increased by 100% year-over-year, according to data compiled by Flyer, which has a multi-asset portfolio trading platform for active wealth managers. There was a 60% year-over-year increase in total trades during this time.

While RIAs are sometimes able to take advantage of their custodian’s block trading desk, larger firms with accounts held at multiple custodians would be better off handling it themselves through a multi-custodial order management system (OMS), like Flyer’s CoPilot. Centralizing investment management and trading enables more consistent decision-making for all the firm’s accounts no matter where they are custodied.

Leveraging a multi-broker, multi-custodial OMS allows an RIA to build a centralized team of trading specialists who execute trade blocks for specific brokers and custodians, and then facilitate an automated allocation process after block trades are executed.  A robust OMS ensures that the allocations from a block trade have the same price delivered seamlessly across many accounts without requiring manual interventions from the trade operations staff.

There are other benefits to block trading.  A study on block trading from institutional research firm LiquidMetrix has shown a negative impact on firms that are slow to submit their block orders (referred to as “resting orders”). In these cases, market prices were seen to drift on average 9 bps in an unfavorable direction (i.e., up for a Buy order). This represents a large potential opportunity cost on the unfilled orders, outweighing the net benefits of filled orders.

The benefits of block trading extend beyond efficiency and cost-effectiveness. After orders are generated from a rebalancing engine, combining them into blocks maximizes trading speed, enabling faster execution. RIAs that allow advisors to trade their own portfolios will suffer from the hidden costs that come from not taking advantage of block trading.

Benefits of Centralized Investment Management Through an OMS

A robust OMS must provide the following features:

  • Managing orders, allocations and executions across multiple destinations and multiple asset classes
  • Automating pre-trade, at-trade, and post-trade compliance checks
  • Monitoring real-time P&L and exposure
  • Tracking and reporting on the full lifecycle of a firm’s orders

Centralizing investment management and trading helps simplify the trader’s job and delivers real-time decision support. Full integration with portfolio management functions delivers better communication between traders and advisors by allowing advisors to monitor the status of their orders in real-time. Seamless integration with the FIX network provides highly available access to global execution venues.

The evidence speaks for itself. Large RIAs that want to remain on the path of continued growth must implement centralized portfolio management and trading. It is the best way to provide scalability, increase operational efficiency, facilitate deployment of complex strategies and enable firms to take advantage of block trading.  Implementing a world-class OMS like Flyer CoPilot lays the foundation for RIAs to build their trading infrastructure to support future growth.

For more about PMS, read our Guide to Portfolio Management Software