The billing process is ironic when you think about it.
You do a good job managing the clients' money, and you earn your rightful share of the gains.
But for the time it takes to handle billing, you lose money. In essence, you are paying money just to ask clients for money they owe you.
You worked hard to earn that money, so don't let internal inefficiencies eat into your profit margins.
RIA billing processes are rife with inefficiency.
For starters, the work is time-consuming. It is manual and laborious, and it requires close attention to detail. For some advisory firms, billing could take a whole week to complete.
Even seemingly small mistakes can result in gross overcharges or undercharges.
Over-charging is a sure way to upset clients. In most cases, do not expect to get the benefit of the doubt; clients will think the overcharge was intentional and malicious.
If you realized you overcharged a client, be upfront about it. Reimburse the client, and let them what you will do to ensure this doesn't happen again. You'll help earn (back) their trust by being honest, transparent, and conscientious.
On the flip side, under-charging is problematic because although clients like fewer fees, the mistakes deny your firm its rightful revenue. Do you feel comfortable asking clients months or even years after the fact to pay up?
Not only will mistakes anger clients, but the mistakes can land RIAs in hot water with regulatory authorities, depending on severity and frequency of billing and fee miscalculations.
In 2018, the SEC's Office of Compliance Inspections and Examinations (OCIE) issued a four-page alert to advisory firms relating to compliance issues, including fee calculation.
The lack of adequate back-office support is a contributing factor to these issues, and industry leaders in this InvestmentNews article shared their take on the topic:
“Oftentimes, the billing errors are inadvertent because something might have been set up incorrectly in the portfolio accounting system, but the key is evaluating it and monitoring it.”
-Amy Lynch, former SEC examiner
“If you’re a true RIA and you do your own billing, and you have less sophisticated systems, that’s when these things occur. I will tell you our billing is down to the penny and we don’t have any of those issues. It’s the difference between having an international company doing this and a mom-and-pop operation.”
-Tom Holsworth, president of AHP Financial Services
“Issues like incorrect valuations, wrong fee rates, and failure to aggregate accounts are oftentimes the result of poor operational and compliance infrastructure rather than intentional misfeasance. Emerging investment firms are often reluctant to hire back office compliance and operational resources who make sure that these mistakes don’t get made.”
-Todd Cipperman, principal at Cipperman Compliance Services
Given the propensity for benign and simple errors, RIAs at a minimum should keep a closer eye on billing procedures.
This means checking inputted numbers, calculation formulas, and making sure clients are getting the appropriate fees according to their AUM and account characteristics. It also means making sure data sources are accurate and easily accessible.
Of course, through manual methods there is a tradeoff between time and money. You can spend more time getting the process right, but the longer it takes, the more company resources consumed.
By upgrading technology and/or working with a partner like Empaxis, you'll get a combination of saved time, saved resources, and assurance that your processes will be done correctly.
When looking at technology, think about keeping all billing and reporting details in a central location. This will save time from having to hunt down scattered data points.
Also, think about systems that combine functionality, reducing your costs. Are there platforms that combine billing with other features you need?
Empaxis is in the business to deliver the highest-quality operational experience to investment firms, and we've been doing this for over 17 years.
Check out Empaxis case studies to see how we've helped other investment firms.
As part of our offerings in middle- and back-office services, we help investment managers in areas like billing.
We understand the challenges you face, and recently we have developed new billing solutions that significantly increase the accuracy and turnaround time for these procedures.
While a billing process could take nearly a week to complete, it is possible for Empaxis to complete the task in as little as one hour.
Empaxis has developed a robust Quality Assurance system that ensures all numbers are and accounted for. It also makes sure the appropriate calculations are carried out according to your requirements.