Asset Management

02:15 PM
Kent Costello
Kent Costello
Commentary
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Automating the Institutional Investing RFP

The slow and mostly manual RFP process in the institutional space adds costs and is inefficient. There has to be a better way.

Every three years, retirement plans, foundations, and endowments issue a request for proposals (RFP) to find and hire new financial advisers. The process, which has seen little technological advancement, can take up to a year from engagement to selection, making the RFP process a continuous and painful endeavor.

As a person born in the middle of Generation Y, my life has been marked by technological advancements. My family bought its first home computer when I was 10, and my college experience was reliant on email and online research. In my life, nothing has ever been fast, efficient, or convenient enough. Everything has constantly been upgraded.

You cannot imagine my shock when I participated in my first RFP in the institutional investor space. My immediate thought was that this process was in desperate need of an upgrade. To this day, RFPs in the institutional space are still in the Stone Age and lead to sky high opportunity costs for the institution and participating financial advisers, shockingly high consulting fees, and a timeline of six months to one year.

Stone Age
The RFP process today is an unreasonable task to place on a fiduciary, let alone to complete every three years. The problems start at the very beginning, when fiduciaries are challenged to identify qualified adviser candidates to vet. Institutional accounts demand a higher level of expertise than your average IRA investor. In a growing sea of generalists, finding the institutional specialists can be like finding a needle in a haystack. Pensions and endowments, hoping to expedite the process, often engage consultants at this early stage. In fact, an executive director of a large pension fund recently stated at a plan sponsor conference that his fund spent over a year and $1 million in consulting, attorney, and staff fees to complete one RFP.

[For more on technology for investment advisers, read: Getting the Digital Agenda Right for Wealth Management.]

Once the adviser candidates are chosen, the fiduciary must send the candidates questions and document requests. From a three-person committee managing a $2 million 401(k) plan to a 20-person board overseeing a $200 million foundation, investment committees of all sizes and sophistication levels often have trouble determining which questions to ask to evaluate the advisers effectively. The sad truth is that fiduciaries tend to rely on Google, past questions, or biased questions provided from the adviser candidates themselves when vetting and filling these pivotal roles.

This high-tech process closes with some help from the US Postal Service. The majority of questions and document requests are satisfied by files sent to the institution via snail mail, even though the committee members are often scattered throughout the country and need duplicate files sent to each of their locations. Why is it that an industry with high levels of capital and monetary efficiency incentives relies on such an archaic process to fill pivotal roles? Institutions are willing to spend and have spent significant sums on RFP consultants. Why not focus on tech consultants?

Innovate
The benefits of innovation are obvious to the savvy Wall Street & Technology reader -- lower opportunity costs, less spending, and trackable data for your auditable files. Why isn't it obvious to institutions?

I wrote this article hoping to shed some light on an age-old process in need of an upgrade. We need a searchable database of qualified candidates. We need a list of populated and educated questions. We need a method of transferring files online, and we need to be able to track our movements for the regulators. If TaxAct and TurboTax can allow millions to e-file and store their data, we should be able to e-RFP.

The technology is out there for our use. We need to get with the times.

Kent Costello is Co-Founder of InHub LLC. Prior to forming InHub, Kent worked as an investment consultant for the institutional arm of Morgan Stanley, Graystone Consulting, and as Vice President of an independent investment consulting firm where he focused almost exclusively ... View Full Bio
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Deb Castellani
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Deb Castellani,
User Rank: Apprentice
7/3/2014 | 10:09:21 AM
Re: A better way is available
Ariana,


Kent and you are providing such a great service to the fiduciary world.  We, like you, cannot believe how antiquated the industry is and how "stuck" they are in their ways.  I think one of the biggest reasons for resistence is the fees consultants make by "assisting" their clients with the "old" ways.  If they used technology like, InHub or The FIRE System, they would lose hours and hours of billible hours.  And who knows, their consulting advice may be proven wrong!

 

Great to see you and Kent helping fiduciaires protect themselves, their clients and their participants.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
7/3/2014 | 9:56:51 AM
Re: A better way is available
Thank you for sharing the data! This is really helpful, especially for companies looking at this type of technology. By knowing others are actively using the eRFP tool, they are more likely to consider it.
Ariana Amplo
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Ariana Amplo,
User Rank: Apprentice
7/3/2014 | 9:40:00 AM
Re: A better way is available
You are welcome!  Since the launch a few months ago we have completed 3 eRFPs, with another 3 in progress and 5 more starting shortly.  These have ranged from a $1m 401(k) plan, to a $20m Foundation, to a $120m Defined Benefit + Defined Contribution combo plan, etc - with investment committees of all shapes, sizes & sophistication levels.  So far the feedback is that it cuts the time, meetings and emails needed amoungst the committee in half, if not more.  
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
7/3/2014 | 7:31:54 AM
Re: A better way is available
Thank you for the additional information. How many clients does InHub have and how many RFPs has it processed?
Ariana Amplo
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Ariana Amplo,
User Rank: Apprentice
7/1/2014 | 1:36:39 PM
A better way is available
What a great conversation!  I could not agree more, with everyone.  I think what has held the Investment vendors (managers, consultants, recordkeepers, and others) from creating this technology is they are good at what they do, but something like upgrading the RFP process isn't a priority.  Although the people that work at these Firms are often early-adopters, the companies themselves are usually slow to implement, especially technology...most are probably still using an outdated Outlook suite as we speak.  They are happy enough to get the RFP and the opportunity to compete for the business. 

I believe there is shift happening right now - all 401(k) Plans, Defined Benefit Plans, Foundations and Endowments have a legal responsibility to follow a 'prudent, documented process' to hire (and evaluate) all vendors.  This can only be accomplished through an RFP.  Only the largest organizations have the luxury of hiring an RFP Consultant to help, the rest are stuck doing it on their own (on average it takes 100+ hours).  Many small companies put it on the 'back burner' due to lack of time or know-how from the CEO, CFO or HR Directors or other committee members. 

BUT the technology is out there...finally!  A new website just launched last quarter, to help investment committees better manage the RFP process in an efficient & streamlined manner.  It includes the flexibility to add custom questions and candidates (or pick from a list) and invite the entire committee to review proposals online, tablet friendly.  Like 'basecamp + sharepoint + virtual consutling' for institutional RFPs.  This is the first big step the industry has seen toward automating this extremely important process, and documenting it better than ever!  Happy to provide more info if anyone wants, or you can watch a quick video here.   

 
IvySchmerken
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IvySchmerken,
User Rank: Author
6/30/2014 | 10:17:32 PM
Re: slow to adopt
Jonathan, that is a good point. A regulatory catalyst might be needed to jumpstart an automated RFP process in investment manager selection. Regulators tend to want more of an audit trail. One potential catalyst could have been the Madoff crisis, where many endowments and charities lost millions by  giving money to Madoff without much due diligence. Regulators might want to see why a particular endowment, foundation or even hedge fund chose a particular manager and what other firms did they consider. What was the decision process? The search process would be documented in an automated RFP.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
6/30/2014 | 12:20:09 PM
Re: slow to adopt
It always amazes me how manual processes are still so common in financial services. There's usually some kind of catalyst for automation, often regulatory I've found. Regulators want things kept track of. That's hard to do with manual processes. I wonder what the catalyst here could be.
IvySchmerken
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IvySchmerken,
User Rank: Author
6/30/2014 | 10:42:07 AM
Re: slow to adopt
It's hard to believe that boards of directors are still using the U.S. mail service to send questionnaires to one another for an RFP in the multi-trillion dollar investment management business. They could take advantage of PDFs and secure sites such as Box, Drop Box, among others. What about collaboration tools such as Share Point? I also agree if consultants are earning $1 million fees from this antiquated process, there is no incentive to make it efficient as they would probably experience a steep decline in business.

 
Becca L
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Becca L,
User Rank: Author
6/29/2014 | 7:18:33 PM
Re: slow to adopt
Ha, When you read the US Postal Service's still has a prominent role in the process, you have to admit, it's time for an upgrade. "Still stuck in the stonage" indeed!
Becca L
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Becca L,
User Rank: Author
6/29/2014 | 7:15:44 PM
Follow the Money
Kent, thank you for this article. It's really very interesting to see this gap in process upgrades.

If you're looking for a reason why this area lacks innovation, maybe follow the money: "shockingly high consulting fees," and "$1 million in consulting, attorney, and staff fees to complete one RFP" Those with the know-how to expedite this process may not see the economic benefit of automation.

That being said, this is an obvious opportunity for new business. At the FinTech Innovation Lab Demo Day, one of the firms of great interest was pymetrics, a "next generation job marketplace" that uses neuroscience and big data to help match candidates to jobs. The presenter claims companies using these techniques see massive efficiency gains in recruitment and overall performance of the new candidate. In conversation with those in the program, it sounds like it REALLY grabbed the attention of FinServ companies. To be honest, I didn't really see why the demand for automated requirement tools is SO strong, but after reading this, I think I have an idea. It would certainly help speed along the arduous process that you've described.
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