Category: Blog

RIA M&A Activity Continues to Reach Record Levels: What Sell-Side RIAs Are Seeking

Mergers and acquisition activity in the RIA industry continues to grab headlines and make history. Despite early setbacks from the coronavirus pandemic, 2020 dealmaking activity bounced back, and Echelon Partners recorded a record-high 205 deals closed last year. The pace has not slowed in early 2021, with Q1 activity achieving a 65% increase over the first quarter of last year.

Our team remains active in the M&A space as well, both at the corporate level and in supporting our partners in completing their own acquisitions. Our team has completed several successful acquisitions throughout our history, and we have built a dedicated M&A team to support our advisor partners as they evaluate acquisition opportunities.

We work closely with advisors who are active acquirers, as well as connect with potential partners for GVA, and are regularly connecting with potential sellers about their objectives. We have seen several common themes emerge from our conversations with sellers regarding what they are seeking in a partner. Here’s what we have observed as the top trends on the sell-side.

A consistent experience is paramount

The acquisition process is inherently disruptive, but for many positive reasons. In some aspects, consistency facilitates a stronger partnership and more seamless transitions. One thing RIAs often look for is a partner who uses the same custodian. Transitioning custodians can be catastrophic for RIAs, a major operational burden that brings a risk of client attrition. Our firm is aligned with LPL Financial, one of the leading custodial platforms in the nation. Our relationship with LPL has been a driving factor in some of our most successful acquisitions and partnerships, making it easier for partner firms to plug into the GVA model on day one.

Enhanced resources and tools close deals

Sellers are not just selling to make a specific profit; they want a clear understanding of how they will benefit from joining your firm. They will be seeking clear details on the resources available to them and how those resources will be delivered. These two factors come together to complete the overall deal structure and help sellers differentiate between potential buyers.

At GVA, our partners come to us because of our in-house expertise, executive leadership team, extensive technology  and operational support services, as well as resources for retirement plan consulting and asset management. We most commonly hear clients ask about access to myself and my partners. We make it a priority to stay actively engaged with our advisors and are consistently creating solutions that facilitate even better communication.

Culture and the impact on staff cannot be overlooked

While the firm’s owners are dictating the sale, the entire firm — from advisors to front-office staff — will be impacted by the transaction. The advisors, the relationships they’ve built with clients and the work they engage in every day are some of the main drivers behind the sale, yet they rarely see financial gain from the actual transaction. Keeping a focus on culture creates an environment where advisors can continue to thrive and allows for a more seamless transaction.

We understand that the sales process is incredibly personal for the seller and we make it a priority to be transparent and responsive throughout the process. We make ourselves available to the entire acquisition partner’s team, ensuring their advisors and support staff have their questions answered, too.

Growth needs to be a mutual priority

Advisors who are aligning with another firm are largely motivated by growth prospects. They want the ability to continue running their business the same way, while having access to added resources, tools and scope to up-level their practice. GVA has built a structured firm with open-architecture features and flexibility for our advisors. Our team is growth oriented, and our goal is to help our partners achieve their goals.

As the sales discussions progress and planning becomes more actionable than aspirational, it’s important that both buyer and seller maintain a flexible perspective. While purchase price is almost always the deciding factor, there are certainly plenty of other opportunities to showcase value. Understanding the mindset of the seller is an important starting point.

For more insight on the M&A process and opportunities for advisors within our network, schedule a call with us. Connect with us on LinkedIn and Facebook for our latest insights and team updates.

Don’t Be Afraid of the Stack – GVA’s Simple Steps to Growth Through Technology

Technology continues to dominate the conversation around advisor growth strategies, and the ability to leverage it as a growth tool remains an important focus for the future. Technology is my passion, and I have always been keenly focused on its role in helping businesses grow and adapt, as well as its ability to revolutionize how we approach our daily lives.

This has become even more apparent within the last year, as more advisors shifted to remote work and more firms were forced to invest in tech to keep business activities consistent. In fact, the TD Ameritrade RIA Sentiment Survey found that RIAs were investing more in technology than planned because of the pandemic, with 33% of firms upgrading tech capabilities because of the shifting workplace needs.

The last year has opened advisors’ eyes to the role technology plays in their practice and its ability to amplify impact or harness growth. Here at GVA, we have always placed a high priority on technology, leveraging it to improve how we work as a team and with the advisors aligned with us. This focus has been instrumental in our growth and ability to partner with advisors from across the country.

Technology is non-negotiable for sustained growth

While advisors know they must embrace technology in today’s world, it can be difficult to know where to start. I recommend assessing your current tech stack and examining what is working, what is being actively utilized by the team and how your practice is benefiting.

Once you have an idea of your baseline, you can begin shopping for other technology assets. There are two silos of technology: 1) tech you need and 2) tech that can help grow your business. The first category includes the basics, like your custodial platform, CRM system and other specific tools — the technology that helps you run your business efficiently. The second category involves the technology you need to grow and that empowers you to focus on specialties — the tech that gives you the “disruption factor” that will create real change.

Technology should allow you to streamline tasks, establish workflows and work smarter. When used correctly, technology can propel your practice to new heights. If your current technology package is not meeting these goals, it may be time to reevaluate how you are implementing tech into your work.

Leveraging technology for our advisors via open architecture

GVA is 100% technology-driven. We have put a very robust technology structure in place with elements that support growth. We have partnered with Align Cybersecurity to design cybersecurity policies and procedures. We offer Valor Asset Management, a comprehensive and technology-supported asset management platform; as well as AdvisorBOB, our dynamic advisor compensation software. We have worked to customize Salesforce for our team’s benefit, with specialized workflows, processes, automation and more to streamline activities and allow more time for business-building efforts. We are currently building our GVA Gateway, which will function as an intranet for our advisors to connect, share ideas and collaborate, as well as a centralized portal with the resources and tools they need to succeed.

We feel confident that we have the right tools and resources in place, and we have designed an open-architecture structure with our technology, allowing firms who align with us to opt to continue using their preferred technology platforms after joining us. They will gain access to our suite of solutions but it is up to them whether or not they use it. We view this is an excellent opportunity for our advisors to leverage what we have built to whatever extent they desire.

How technology has revolutionized GVA’s approach

Our focus on technology has been intentional and supports our larger approach to working with advisors. Our goal is to help advisors up-level their practices, as well as provide them with the tools and resources they need to grow their firms and meet their long-term objectives.

The technology we have in place is attractive to our advisor partners, but also allows us to collaborate with them in a better and more meaningful way, effectively elevating the conversation from surface-level to an in-depth and actionable discussion. We can quickly view and publish reports and benchmarks against similar advisors, and we have more visibility into our partners’ businesses so we can understand their challenges and trends. This allows us to explore challenges and create solutions in real time, connect them with other advisors who have faced similar challenges and collaborate in a way that makes everyone better. My colleagues and I can give real advice, outlining specific tools that will work for you and more. We are solely focused on helping you grow your business.

As technology becomes more central to our lives, it’s impossible to ignore the implications it can have on your practice. Technology is nothing if you don’t have anyone using it — and doing so to its full potential. We view it as one of the best tools available to meeting your short- and long-term goals and facilitating meaningful connections. For more insight on the technology we employ to improve workflows and empower advisor growth, and how we can help you leverage technology to grow your practice, schedule a call with us. Connect with us on LinkedIn and Facebook for our latest insights and team updates.

M&A Leaders by Design: How GVA Has Proactively Built an Attractive Partnership Brand

How to Add a Partner to My Business? - Ontario Business Central Blog

RIA dealmaking activity continues to break records. While the pace of transactions slowed in early 2020 as the pandemic took hold, acquirers produced strong numbers in the latter half of the year. According to research from ECHELON Partners, 2020 dealmaking activities outpaced those of the prior year and fourth quarter 2020 activity was up 25% over the third quarter.

As activity continues to heighten, more RIAs are putting their name into the mix on both the buy and sell sides of the equation. But not all transactions are created equal, and as the landscape becomes more active, the need for strong culture- and values-based partnerships is increasingly apparent.

At GVA, we see tremendous potential for advisors to grow when aligning with the right team. That’s why we have proactively built GVA into an attractive partner enabling RIAs to thrive within our network. We are solving the problems that hamper growth and empowering our advisors in the process. Here’s how:

Operational Activities Burden Advisor Growth Opportunities

Running an effective and efficient RIA involves multiple moving parts and the support of various specialists to meet all legal and regulatory requirements. This creates a significant operational burden on many small-to-mid-sized RIAs, and the need for support and resources is a key driver in advisors wanting to sell.

We have designed effective in-house capabilities that allow advisors to easily assimilate with our firm, support growth and create economies of scale, including:

  1. Internal and external compliance partners: We have an in-house compliance team that onboards advisors, monitors compliance obligations and ensures each advisor can focus on his or her business and clients. We also partner with Cipperman Compliance Services  externally to ensure our team has the most current and comprehensive resources available.
  2. Dedicated asset management arm: Managing client assets requires specific expertise and resources. The Valor Asset Management team sits on-site with our advisor and leadership team in our Paoli, Pennsylvania, headquarters and offers various investment models designed to mitigate risk, support performance and save advisors’ time.
  3. Customized technology solutions – To remain competitive in today’s environment, having access to sophisticated technology is key. One of our main technology offerings is our compensation platform, AdvisorBOB, which provides full transparency into income channels and expenses so advisors can better plan and ensure they are properly compensated.
  4. Long-standing professional relationships – GVA has prioritized aligning with the right professional partners to support long-term growth for its advisors, including legal resources and experts at Stradley Ronon and the broker-dealer support of LPL Financial.

The Right Partner Is One With Flexibility

There is no one-size-fits-all solution for sell-side RIAs, so it is important to align with a partner who is willing to be flexible and customize the partnership to meet evolving goals and needs. In our conversations with advisors, we recognize there are varied reasons to pursue a sale, from wanting to fortify a legacy, to providing ongoing support to the client base, and facilitating longer-term and scalable growth. Each of these motivations is important to the seller and for good reason. We work to understand the “why” behind the sale and are diligent in customizing the partnership to meet that goal in a way that appeals to both the seller and our team. This commitment yields a stronger partnership from the outset.

Relevant Experience, Strong Leadership

The incredible pace of transactions currently occurring may suggest such moves are systematic. Partnering with an experienced buyer is essential to ensure the deal flows smoothly and all aspects of the transaction are assessed prior to the commitment. Our M&A team is entirely dedicated to growing our firm via acquisition and supporting our advisors in pursuing growth via acquisition as well. We have a strong and experienced leadership team that is fully focused on the M&A space and appropriately executing each deal. From properly valuing the book of business to sourcing financing and supporting onboarding measures, our team has hands-on experience in creating successful transactions.

The Client Experience Reigns Supreme

Ask any advisor about the motivation behind their business, and most will tell you it is to help clients achieve their financial goals. When we engage in conversations with advisors who are considering selling, we often hear them emphasize the importance of maintaining the client experience and enhancing the services offered. We counsel our advisors and potential partners to align with a firm that offers obvious synergies but also brings something different to the table. As you navigate the integration process, remember that you are gaining new intellectual property, economies of scale and offerings for clients.

In a 2020 survey, RIAs reported that achieving organic growth was a significant challenge. When aligning with the right partner, growth no longer represents a roadblock to success. We sit on the same side of the table as our advisors, serving as advocates for them, their firm and their future. Aligning our objectives and actions in this way paves the road to success.

For more insight on how we can help fulfill your firm’s growth objectives, schedule a call with us. Connect with us on LinkedIn and Facebook for our latest insights and team updates.

Key Trends Shaping the 401(k) Landscape in 2021

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2020 was a record-breaking year for the markets. Following March lows as the pandemic emerged, the major indexes produced historic returns for investors by year-end. The market rally helped support 401(k) account balances too, with the Employee Benefit Research Institute reporting that the average balance for older workers was up 15.5% at year-end. 

401(k)s continue to be the preferred retirement vehicle among savers, so these marked gains bode well for the nation’s retirement future. Our team recently introduced a dedicated 401(k) consulting practice where we help plan sponsors manage qualified and nonqualified retirement plans. We provide comprehensive solutions designed to the client’s goals by working closely with them to understand their needs and business culture, as well as how they operate and interact with their team. Our goal is to make it easier for plan sponsors to offer the benefit of 401(k)s to their employees, from assistance with plan design and administration to HR and payroll, employee education and benchmarking; while providing them with the support of GVA’s extensive network of financial professionals. 

We are encouraging our plan sponsor partners to use 2020’s surprising success as a jumping-off point to continue improving their plans for participants. It’s important to understand the trends shaping the retirement landscape in order to optimize the plan. Here’s what our team is watching for our plan sponsor partners:

Regulatory changes make way for new opportunities in 401(k)s: The SECURE Act created an opportunity for small employers to expand their retirement benefits and gain access to more competitive service fees and offerings through pooled employer plans (PEPs). The Department of Labor (DOL) issued its final guidance in November and solidified the option for employers to participate in the new structure, allowing smaller plans to combine and receive better service at a lower cost. This is an emerging opportunity for plan sponsors to improve retirement benefits for their employees by leveraging a larger participant base and ultimately improving outcomes for those participants. 

Retirement income comes back into focus: For the last several decades, the 401(k) industry has focused on the accumulation phase of retirement planning. Yet this approach resulted in an inadequate focus on retirement income and its ability to support lifestyle. The Center for Retirement Research predicts nearly half of Americans will not be able to maintain their current lifestyle after they stop working, underscoring a stark reality for most aspiring retirees. A shift in focus among plan sponsors and plan advisers could significantly impact the future of participants. 

New demand for alternatives: Within the last year, we have seen a surge of interest in alternative investments, made possible by new provisions — like last summer’s DOL guidance on allowing private equity investments in qualified plans. Particularly as plan sponsors understand alternatives better, there will be a push for larger plans to add collective investment trusts and private equity investments to qualified plans on the corporate side, and we expect investment menus to include new options for investors this year.

An integration of health and wealth: Employers have seen how employee health directly relates to overall productivity and the focus is now extending to financial wellness too, as it becomes more important to both plan sponsors and participants. Sixty-two percent of employers report feeling “extremely responsible” for the financial wellness of their employees, according to Bank of America’s annual workplace benefits report. Many employers offer some degree of financial wellness within their plan, but we expect to see an increase in the types of benefits provided. Additionally, among employers who have not previously offered a plan, we believe many will introduce one this year in an effort to improve overall outcomes. 

Plan design features remain at the forefront: Plan design has always been a key component of employer-sponsored retirement plans. Automatic features have become popular in recent years and remain important in plan adoption. Small plans are implementing unique employer-level contribution strategies with different levels of profit sharing for key employees or those nearing retirement. 

We see a common theme emerging among these trends: Plan participants are calling for more support in meeting their retirement goals. It is up to plan sponsors to uncover new ways to provide it. Reviewing key trends and responding to changing tides within the 401(k) space is one of the best ways plan sponsors can meet these evolving needs. 

For more insight on how we can help streamline your company’s 401(k) offering, schedule a call with us. Connect with us on LinkedIn and Facebook for our latest insights and team updates.

This information is not intended as authoritative guidance or tax or legal advice. 

Is M&A Your Best Path to Growth in 2021? What Aspiring Acquirers Should Know

Dealmaking momentum in the RIA space continues to build, and Echelon data reports it reached record levels in the third quarter of 2020 despite earlier pullbacks from the pandemic. Evolving client demands and quickly shifting technology and resource needs, coupled with outsized valuations and a lack of proper succession planning by independent advisors, have all driven activity in the space, and this activity is on track to continue.

From the acquirer’s perspective, M&A can be a fast-track to growth, with many advisors looking to onboard entire books of business and quickly multiply AUM numbers. Yet, acting as an RIA buyer isn’t right for everyone.

Having the right approach to M&A is vital to short- and long-term success. At GVA, we support our advisors in growing organically and inorganically and play a significant role in advancing and supporting dealmaking activities within the network. We know the best practices because we’ve sat in your seat before too. Jumping into the M&A space requires a tested strategy and the right support to be successful. Here’s what aspiring buyers need to know.

Leveling the Playing Field in a Seller’s Market

The steady rise in buying activity is making for a very crowded marketplace, so it is important that serious acquirers position themselves to stand out among a sea of buyers.

Long before you engage in conversations with prospective acquisition partners, you must invest time on the back end, securing a strong financing partner and banking relationships to ensure you have the capital to buy when the right fit emerges.

Once the financing is shored up, it’s time to look the part. This means assessing your public-facing assets and image, from your website to your office space and your current team. Do these assets send the message you want and position you as a leader in the industry? If not, spend time cleaning these up before entering the M&A market. You can also be reactive with these assets. If an acquisition target is asking about specific offerings or resources that are not already featured on your site and supporting materials, it is a good chance to update your assets and better position yourself for future partners.

Identifying the Right Partner to Fuel Your Growth

Finding the right acquisition partner requires a significant time investment. Often the best-suited transactions take time — sometimes even several years — to materialize. As you look to grow, the focus must be on enhancing the practice you have built. While it can be tempting to move on all of the targets you meet, it is essential to find the right partner. This perfect “fit” will lay the foundation for a successful relationship in the long term.

There are three things advisors should keep top of mind when seeking an acquisition partner:

  1. Geography – One of the biggest value-adds advisors bring to the table is an intimate knowledge of the community they serve. As advisors seek partners, it can be tempting to look beyond your immediate area, but this can prove to be a significant stumbling block. It is important to have access to be able to meet with your clients in person. Closer is better, but areas extending beyond a two-hour drive are likely too far.
  2. Culture – The culture you create in your firm is hallmark to your offering, so it’s important that acquisition partners share a similar philosophy. Aligning a practice after acquisition requires much effort on the administrative and operational end, so when the firms’ joint culture is already complementary, it can alleviate an extra burden.
  3. Size and scope – It can be tempting to eye a larger purchase to propel growth, but buying a much larger firm can lead to issues as you navigate the transition period and assume the book of business. One of the most common missteps we see is overleveraging. In today’s environment, outsized valuations are common, and advisors can market a practice for much more than its actual value. It is not worth taking on significant debt for a firm that is not valued appropriately.

Preparing to Onboard

Handling the transaction is a relatively small feat when compared to the task of onboarding a new book of business. The onboarding process is a time and financial investment, requiring the help of internal and external partners to be successful.

The financial aspects should be accounted for early in the process, particularly if you need to add staff to assist with new business. You should also spend time preparing your current staff for the transition and ensure they can handle the new workflow. The seller will continue to monitor the process and want to see their clients well-cared-for and in the best hands. If your team is overwhelmed by the new work, it will strain the onboarding process and relationship with the seller.

A Partner You Can Trust

When you are acquiring a firm, you can’t go at it alone. You will likely need to tap outside resources and partners, including your custodian, third-party money managers, technology providers and other partners. GVA’s mission is to empower our advisors’ growth, both organically and inorganically. We strive to be a partner our advisors can trust to advance their practice and position them for success.

As more M&A opportunities present themselves, we are here to help our advisors navigate the process. The M&A process is multifaceted and we provide comprehensive support, including:

  • We help in identifying potential targets — specifically advisors in our network who have indicated an appetite for acquisitions — or properly vet potential acquisition targets our advisors have sourced on their own. GVA includes a strong network of advisors who are growth-oriented and several are well-positioned as industry leaders and are ready to onboard new teams. We recently added a new Real Estate page to our website, highlighting these firms where there is opportunity to grow.
  • As targets are identified, we perform extensive due diligence to determine appropriateness of fit, factoring in geography, culture, service suites and valuations. M&A transactions are often emotionally charged, so we offer a third-party perspective on the in’s and out’s of the deal to ensure it aligns with our advisors’ goals.
  • All acquisitions completed within the GVA network are routed through our RIA, so we offer assistance on the tactical end of the deal, with support for onboarding, legal and compliance issues and the financing structure. We look at the transition in the immediate term, but also take the long-term view, projecting what needs to be completed to maintain the successful transition in years to come.

The M&A process can be an exciting opportunity to grow, particularly if you have designed a strategic approach and aligned with the right support to navigate the process. For more insight on the M&A process and opportunities for advisors within our network, schedule a call with us. Connect with us on LinkedIn, Twitter and Facebook for our latest insights and team updates.

Year-in-Review: A Look Back on 2020 Market Activity and Key Areas of Focus for 2021

Greetings GVA Friends, Happy Holidays!  I hope this note finds you well and in good health.  As we near the end of 2020, I wanted to share some thoughts with you on what has been one of the most dynamic and challenging years, not only in the investing world but in our daily lives.  The way I see it, 2020 was a “one-hundred-year storm” and looking ahead to 2021, I see the beginning of a new year, a new era and quite simply a new start for all of us.  So let’s push the rest button and look ahead to 2021!

In addition to my thoughts below, we have all kinds of information posted to the Valor Library on the GVA portal on Salesforce.  For example, we recently posted two new “Valor Views” documents that provide additional thoughts, data and commentary on the market and economy along with changes we made to the Valor models for 4th quarter 2020.  We also have our normal position reports for all Valor models and the latest performance posted out there.

Thank you and I wish you all the best during this holiday season.

* * * * *

“The Year of Everything”

Advisors in the Great Valley Advisor (GVA) network know I have referred to 2020 as “The Year of Everything”, a lighthearted moniker for one of the most challenging and dynamic years we have ever seen.  The events of 2020 have not only thrown a wrench in our daily lives, but also brought unprecedented uncertainty in the markets which led to wild swings all year long.  From the economic fallout at the beginning of the year to the election at the end of the year, 2020 has been a constant blur of “Everything”.  Words like “vaccine”, “stimulus”, “shutdown”, “social distance”, “PPP”, “new norm”, “recession” and “recovery” have become a part of everyday conversation.  And they have highlighted a rapidly evolving news cycle that has taken a life of its own day in and day out as new information becomes available. 

Quite simply, there has been a lot of noise for investors to sift through this year.  This noise has led to extremes in the market we have not seen in a very long time.  Perhaps ever.  The US Government and The Fed made several moves during the year to help temper these extremes.  These moves were not only historic, but they were necessary to help stimulate the economy.  But all of this led to a very uncertain backdrop as investors assessed their investment strategy in 2020.  And we know from studying behavioral finance that investors are inclined to let outside factors influence their investment decision-making process.  That certainly rang true this year, but the flipside to that for investors is to try and look beyond the noise and try to focus on the quality and defensive oriented investments the market can offer to help provide ballast to their portfolios.  This sentiment has become increasingly important in the current environment.

To that point, at Valor, we not only stayed true to our investment discipline and process throughout the year, but we added new steps and new checks to our modeling process to help improve our decision making.  For example, we introduced a stress testing methodology to test all of our models for another COVID type scenario.  That gave us a nice range of confidence between upside and downside expectations in the event the market takes another turn.  We not only used that for our own models but passed that information on to the GVA network to help equip our advisors with the data, information and insight they needed to help with their modeling needs.  This not only educated our advisors but also helped them facilitate meaningful conversations with their clients.  All of this was meant to drill down to the core positions of our models and focus on the factors that could affect performance, especially on the downside.  This approach was in keeping with the principals rooted in our Valor investment philosophy: keep it simple, focus on the fundamentals, block out the noise and manage risk through diversification. Now that we are at year-end, this presents an opportunity for us to look back on the year, assess wins and losses, reflect on lessons learned, and look ahead to the new year.

A Look Back on 2020

Back in January, investors welcomed a new year without any warning of what was truly in store.  2019 was a record year for the markets; the S&P 500 was up over 28%, the Dow was up 22% and the tech-led Nasdaq was up 35%.  Investors, including myself, largely expected to enjoy the extended bull market.  Early market performance indeed showed that as gains continued, and in February all indices reached then-peak levels.

In mid-March, everything changed as the coronavirus pandemic took hold and completely altered the nation’s way of life.  The global health crisis prompted an emergency response, with a swift market correction fueled by staggering unemployment and the start of a recession.  In April, we contemplated the “shape” of the recovery, reopening timelines and prospects for stimulus.  We now have much more clarity on these issues, and we have since seen the markets make a so-called “V-shaped” recovery, breaking and setting new record highs in the S&P 500 and the Dow.  As if that hasn’t been enough, we also saw a highly contested election in November which we are still feeling the aftereffects of, and there is still one more election to go with the Georgia runoff on January 5th, 2021 which has huge implications. 

Volatility Reinforces the Importance of Diversification and Downside Protection

Pandemic-driven market volatility coupled with mounting political concerns, civil unrest and other events this year have left investors on edge about their portfolios.  At Valor, we certainly did not expect everything that happened this year (“murder hornets”?) but we did prepare for a possible downturn at the beginning of the year after we saw record performance in 2019.  Then when the pandemic hit, we saw unprecedented volatility which caused all asset classes to rapidly decline.  Quite simply, there was no place to hide.  After that, we stayed true to the Valor investment philosophy by continuing to invest in quality companies and managers with a competitive advantage, strong balance sheets and solid fundamentals.  But we also sharpened our pencils and began shifting exposures to asset classes and companies that had a defensive and “COVID type” element to their business.  For example, the “stay at home” trade complemented our models very well this year and it kept us diversified to help us manage risk and downside protection. 

Speaking of risk, we expanded our thinking this year on this very important concept, which is sometimes overlooked by clients who typically focus on the upside.  But the downside is just as important, if not more, because as we saw in early 2020, a sudden drop in the market can be a drag on your portfolio and can eliminate long felt gains in one fell swoop.  To help prepare for that possible scenario again, we stress tested all of the Valor models and focused on minimizing downside capture for the level of risk each model would take.  Now, like I said, there was no hiding in March and April, and we bounced out of it, but going forward we prepared ourselves for downside protection with diversification and sensible investments on both the equity and fixed income side to help dampen volatility when/if it happens again. 

How the Valor Models are Positioned Going Forward

The pandemic will continue to be a significant concern for investors as we head into 2021.  Even though a vaccine will soon be available nationwide with the first shots just given on Monday 12/14, the distribution and effectiveness may be cause for concern.  There are also concerns about new spikes in case counts across the country which is prompting many states to shut down again.  We have seen this in recent jobs reports where jobless claims are rising again.  But it is my expectation that the measures being taken now across the country, along with a successful vaccine rollout, will lead to a positive outcome in 2021 and beyond.  But it will take time.  The economy will follow suit but again it will take time and be a slow recovery as jobs slowly come back.

The political landscape is also creating some cause for concern.  The January 5th, 2021 Georgia runoff election will also have potential downside implications on the market if the Senate flips from Republican to Democrat.  Both Democratic candidates will have to win on order for that to happen, but current polls show a tight race

With all of that in mind, we feel it is important to maintain a focus on quality and downside at this time.  On the equity side, that means a continuation of our current thinking by investing in a combination of what we call our “core” companies/asset classes that offer quality and strong fundamentals along with defensively themed names.  On the fixed income side, that also means staying with a defensive theme by maintaining increased exposures to government bonds, investment grade corporate bonds and global bonds, all of which perform better in a volatile market.  We also shifted out of real estate and into gold which is a benchmark for stability but also has an inflation-hedging component which should pick up slowly in 2021 and beyond (we invest in gold through the miners who have better margins).

Key Areas to Watch in 2021

Many of the same themes we were watching earlier this year are still very relevant as we head into year end.  But as we look ahead, here are our primary areas of focus:

  1. Vaccine Optimism Balanced with Ongoing Risk from the Pandemic

The coronavirus pandemic remains a top concern among investors, with the CDC reporting over 12 million cases in the United States, and numbers currently rising.  The best news we received was when the Pfizer vaccine got approved by the FDA for emergency use.  But this will create an interesting dynamic in the markets going forward which I view as a pendulum shifting in investors’ minds between “fear of loss” if something goes wrong and “fear of missing out” if science does prevail.  The markets will be sensitive to this and all news surrounding the vaccine, distribution plans, side-effects and effectiveness.  In the end, I expect the vaccine to be a success, but the rollout will be slow and there will probably be some setbacks as the population receives treatment.  But we should all expect a methodological rollout with some potential setbacks. 

  1. New Stimulus Package

Record levels of stimulus have already been circulated throughout the economy this year and on Sunday, Congress agreed to a new $900B round of stimulus.  It will now go up for an official vote but assuming it passes into law, this will certainly be a welcome sign for the economy.  Especially as we enter the winter months.  I had expected a new package to be delivered to the American people but wasn’t sure it would get done before the end of the year so it’s nice to see this happening now.  The resulting cash infusion, new PPP loans and enhanced unemployment benefits should continue to spur the consumer and businesses alike.  But as with all packages like this, it will not come with unlimited funds and unlimited relief.  In the long run, the economy will have to eventually support itself.  If not, another round of stimulus may be necessary.  If that happens, investors should expect new debates and new negotiations, all with a new Congress in 2021.  This is certainly a developing story and one the market will continue to monitor very closely as time goes on.  But I’ve always believed “something is better than nothing” and with this new package, the economy will have renewed hope and the support it needs to stay in check.

  1. The Georgia Runoff and Potential for More Volatility

We closely monitor the Chicago Board Options Exchange Volatility Index (the “VIX”) for indications on future market volatility.  We expect volatility to be driven by continued political uncertainty, specifically the Georgia runoff election in January and its potential to significantly impact the legislative landscape.

  1. Corporate Profits and Opportunity

The pandemic is fueling areas of opportunity and we can already see this as the markets have broadened a strong momentum-based rally as we end the year.  This is a signal inferring equity valuations are attractive and the market expects a recovery next year.  But the question lies where and in what sectors?  For one, it will be sectors that benefit from an economic expansion which will ultimately drive corporate profits and favorable results going forward.  Some sectors to consider in this environment are consumer discretionary, financials, technology and healthcare.  Consumer spending is expected to remain strong, particularly if inflation picks up, and the technology sector is working quickly to meet the needs of the new digital lifestyle. Healthcare remains strong as testing increases, demand heightens for medical supplies and vaccine trials and distribution progress.

  1. The Economy – Key Economic Data Will Take Center Stage

GDP reached a record growth rate in the third quarter and investors will be watching to see if growth is sustainable.  Other key indicators, including unemployment numbers and housing starts, will stay in focus as data suggests a recovery.  Momentum in these areas needs to stay on course for positive change to occur.

Final Thoughts

The events of 2020 have been unprecedented.  The related market, consumer, government and economic response has been unprecedented as well.  While these challenges were all new, our country has adjusted to a new way of life and a new way of doing business and that has led to many bright spots this year too.  I do see light at the end of the tunnel, and I have been especially encouraged by the rally we saw over the summer which wiped out the bear market returns we experienced when the pandemic hit.  I am even more encouraged by the broadening rally we are now seeing as we close out the year.  To me, both of those trends indicate ongoing signs of recovery and progress.  And quite simply I don’t think America would have it any other way.  We continue to maintain a focus on the long-term by investing in companies with a competitive advantage, strong fundamentals, resilient performance and growing cash flows.

Thank you for your time reading this note and please check out all of our materials posted in the library section of the GVA portal on Salesforce.  We not only post regular market updates like this but also all Valor model allocations, all the positions and all the performance information.  And please connect with us on LinkedIn and Twitter for our latest insights and team updates.


  1. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  All performance referenced is historical and is no guarantee of future results. Value will fluctuate with market conditions and investments/portfolios may not achieve its investment objective. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
  2. Consult your financial advisor prior to making any investment decision.
  3. Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing.  The prospectus and, if available, the summary prospectus, contain this and other important information about the investment company.  You can obtain a prospectus and summary prospectus from your financial representative.  Read carefully before investing.
  4. Asset allocation does not ensure a profit or protect against a loss.  All investing involves risk, including the risk of loss.
  5. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
  6. The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
  7. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
  8. Long positions may decline as short positions rise, thereby accelerating potential losses to the investor.
  9. Bonds are units of corporate debt issued by companies and securitized as tradeable assets.  A bond is referred to as a fixed income instrument since bonds traditionally pay a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common.  Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.  Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
  10. Corporate bonds are debt obligations issued by corporations to fund capital improvements, expansions, debt refinancing, or acquisitions. Interest is subject to federal, state, and local taxes. The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
  11. Investment grade bonds are those rated BBB and above by Standard & Poor’s or Baa and above by Moody’s
  12. Municipal bonds are bonds issued by state and local governments to help fund large, expensive and long-lived capital projects in the communities they serve (like a bridge, toll road, school or airport).  They are subject to availability and change in price.  They are also subject to market and interest rate risk if sold prior to maturity.  Interest income may be subject to the alternative minimum tax.  Municipal bonds are federally tax-free but other state and local taxes may apply.  If sold prior to maturity, capital gains tax could apply.
  13. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above.  They generally should be part of a diversified portfolio for sophisticated investors.
  14. Preferred stocks are “hybrid” investments, sharing characteristics of both stocks and bonds. Like a stock they are generally paid after a bond, but like a bond they offer a fixed rate of payment and par value upon maturity/redemption. Risks can include interest rate risk, longer duration, lower credit ratings, and sector concentration, etc.
  15. Convertible bonds are a type of debt security that can be converted to a fixed number of shares of the issuer’s common stock.
  16. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. Precious metal investing involves greater fluctuation and potential for losses.
  17. Alternatives are investments that don’t fall into traditional investment categories—namely long-only stocks, bonds, or cash. Alternative investment managers can invest long or short, across multiple asset classes, aren’t constrained to an investment style, and aren’t entirely dependent on the markets going up to achieve positive results.  Examples are hedge funds, private equity, event driven, long/short, hedged equity or “multi-strategy” which is a combination of the various alternative strategies.
  18. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
  19. Dividend yield refers to a stock’s annual dividend payments to shareholders, expressed as a percentage of the stock’s current price.
  20. An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
  21. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
  22. Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize long-term free cash flow (FCF).
  23. Market capitalization is a measurement of the size of a company, interpreted as the market’s total valuation of the company, obtained by multiplying the number of shares outstanding by the current price per share.
  24. The S&P 500 Index (the “S&P 500”) is a stock market index that measures the stock performance of 500 United States based companies listed on stock exchanges in the United States.  It is a “market capitalization-weighted” index meaning the index is calculated by weighting the respective market capitalization of each constituent (calculated by multiplying the current price of the stock by the total shares outstanding).  The S&P 500 is often used as a proxy for the U.S. stock market.
  25. The Dow Jones Industrial Average Index (the “DJIA” or “Dow”) is a stock market index composed of 30 United States based companies found on the New York Stock Exchange, with only a handful of Nasdaq-listed stocks such as Apple (AAPL), Intel (INTC), Cisco (CSCO), and Microsoft (MSFT).  Along with the S&P 500 Index and the Nasdaq Composite Index, the Dow is one of the three most-followed stock market indices in the United States. The Dow is a price-weighted index, meaning its value is derived from the price per share for each stock divided by a common divisor.  The term “Dow” comes from its founder Charles Dow.
  26. The Nasdaq Composite Index (the “Nasdaq”) is a stock market index that includes all the companies listed on the Nasdaq stock exchange.  It is roughly 3,300 stocks.  The term “Nasdaq” refers to the National Association of Securities Dealers Automated Quotations exchange, the first electronic exchange that allowed investors to buy and sell stock on a computerized, speedy, and transparent system, without the need for a physical trading floor.  The Nasdaq is heavily weighted towards companies in the information technology sector (“tech” or “internet” companies) but there are financial, consumer, biotech, and industrial companies as well.  Just like the S&P 500, it is a market capitalization-weighted index where its price is calculated by weighting the sum products of the closing price of each stock by their respective shares outstanding. 
  27. The “VIX” is a popular name and ticker symbol for the Chicago Board Options Exchange’s CBOE Volatility Index.  It is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility (“implied volatility”) and is based on the prices of call and put options on the S&P 500 index that are traded daily.

Crafting Your Legacy: 4 Succession Planning Considerations for Advisors

There is no doubt that 2020 has been a challenging year, as advisors shifted to mostly digital practices and navigated market volatility alongside their clients. Year-end will represent a welcome relief for many advisors who were forced to reevaluate their approaches over the last several months. But as the new year beckons, succession planning is one significant item that should be on every advisor’s checklist.

A well-designed succession plan preserves the personal and business relationships that advisors have developed within their practices. It is an essential element if a business is expected to continue beyond the advisor’s retirement. Yet, 73% of financial advisors do not have a written succession plan in place, and 60% of those without a plan are within just five years of retirement, according to a 2018 survey from the Financial Planning Association.

The strongest succession plan is considered early and evolves as your business expands; it is a living document that you adjust to align with your values and goals for your business as it grows. The plan is created with the owner in mind, but also has direct benefits for your clients, business associates and family. While you focus on doing everything in your power to better the lives of your clients daily, don’t lose sight of the fact that having a plan in place for your future impacts them as well.

If you’re unsure where to start, the following four considerations will lead you in the right direction. Great Valley Advisor Group (GVA) is here to help with every step.

1. Start by Taking a Step Back From the Day to Day

The first step in designing a strong succession plan is quite simple: Put pen to paper and translate your thoughts and goals into a concrete, yet flexible plan. Take a step back emotionally from your business, and gather the hard data on every aspect of your book. This includes total assets under management, types of assets, number of households, client demographics and more. These data points will be instrumental in reaching a reasonable and realistic valuation of the business.

Advisors tend to numerically overvalue their firm. And we understand why: Trying to put a number on something you have devoted your whole life to is difficult! GVA offers valuation services that provide an objective industry perspective on the dollar value of your business, but we also recognize that your practice is more than just a company. It is an integral piece of your family’s legacy and should be considered as such. Your loved ones should be incorporated into the succession planning process as well. When developing your plan, be sure to clearly outline what your family and beneficiaries will gain from the sale of the practice. Once the numbers have been clearly defined, you can begin to dive into the less quantifiable facets of succession planning.

2. Keep the Intangibles Top of Mind

Throughout the process of creating a succession plan, you should envision what you want your practice to look like after you have exited. Which aspects of the company would you most want to see preserved? These elements help define your legacy.

No matter your sales timeline, you have a responsibility to your clients. They work with you for a reason that likely relates to shared values. The advisor-client relationship is based on more than just trusting someone with your money; it consists of abstract constructs, such as the alignment of ethics and values. The successor who takes on the business also assumes responsibility for the company culture and should be made aware of what clients will expect. This intangible construct should be a key factor as you search for a successor.

3. The Right Partner Shares Your Philosophy

Choosing a successor is often what holds advisors back from beginning the succession planning process. The FPA survey referenced above notes that 67% of advisors worry the business will not be as successful if they are not at the helm. Overcoming this fear can be as simple as establishing trust with the right person.

Whether potential successors are courted internally or externally, plans should be considered early and often because they take time to design and execute. Some advisors choose to mentor a junior advisor already on the team or proactively identify a candidate through an internship program. When selecting an internal candidate, it is vital to foster open communication within the team to ensure everyone remains aligned with the end goal.

If you have not been able to locate the right candidate internally, you should start seeking outside partners. GVA provides support for advisors in this position, offering resources and tools to facilitate a successful pairing and transition process. Our network is expansive and opens the door for conversations with the right types of advisors. We help to identify someone who is both fit for the job and aligns with your values.

No matter how you find the successor, it is critical to do your research. Don’t choose a successor until you are absolutely certain they are the person you want to carry on your legacy. To GVA, finding your perfect match is the top priority. In some cases, the advisor match may be clear but the financing presents a challenge. GVA can help by providing capital up front to facilitate the transaction, so both sides can rest easy.

4. Continue Growing and Improving Upon Your Business Model

As you design your plan, identify areas of improvement for your practice. This process will make your business stronger in the immediate term and more marketable over the long term. Some pain points might not be easily addressed, but identifying them could help you choose the right buyer to improve your offering for clients. Be sure to document how you have resolved issues and overcome challenges, so you can share these relevant details with potential buyers.

GVA understands your business and respects what it means to you, your family and your livelihood. Realizing that you do not have to go through this sensitive, yet critical, process on your own can be the catalyst you need to embark on the journey of succession planning.

Connect with us on LinkedIn, Twitter and Facebook for our latest insights and team updates.

Asset Management as a Value Add: How RIAs Can Leverage Investment Resources to Help Advisors Harness Growth and Focus on Their Client Base

2020 has been a volatile year in the financial markets, with the presidential election, the pandemic and civil unrest contributing to widespread uncertainty. Investors are increasingly looking to their advisors for new strategies to ride out volatility without derailing their long-term plans. With clients seeking additional support, it presents a challenge for advisors who strive to be reliable partners to their clients and add value, while simultaneously seeking opportunities to grow the business. As advisors look to scale, they reach a pivotal point where they must decide where to focus their time and efforts.

One area where advisors can save time and create efficiencies is through asset management. We believe when asset management is approached strategically, it can differentiate your business, propel growth and help your clients meet their long-term goals. We provide support for advisors on this front through Valor Asset Management. An extension of our core GVA offering, Valor is one of the many solutions GVA provides to help streamline our advisors’ days, so they can focus their time and resources on working directly with clients. Here, we spotlight the philosophy behind Valor and the benefits it offers to GVA advisors.

A Solution Designed for GVA

To understand where we are now, it is important to highlight how we got here. GVA was founded on the traditional RIA structure, and we provided compliance and back office support to those wishing to transition to an independent practice. This approach supplied the foundation for all those in our network to grow their businesses and achieve the structure they desired. As we broadened our network and solidified our foothold within the backend support channel, we recognized an opportunity to expand our focus to include another core offering for our advisors: asset management.

Four years ago, we welcomed Lee Johnson Jr., CFA, to our team as our chief investment officer and he set out to create what are now known as the Valor models. His focus was on methodically and strategically building models that met our advisors’ goals of managing investment risk while advancing clients toward their long-term objectives. The models need to work for investors at various risk levels and be customized to advisors’ preferences.

As the models took shape, we offered them to advisors within the GVA network, who could choose to outsource their entire asset management function to Valor or utilize the extensive research within their own strategy. This dual-sided approach puts the power in our advisors’ hands and creates a launchpad for growth.

A Disciplined and Customizable Investment Approach

Valor offers eight models with a range of diverse exposures. The suite includes three equity-only models and five ETF and blend models that range from very conservative to very aggressive. Each model is directly managed by our CIO and his team, and the strategies meet various investment objectives and risk metrics.

Valor models are unique for a variety of reasons, particularly the highly trained team behind them. These experts have designed an investment approach that manages risk while also driving growth, thanks to the underlying actively managed strategy.

Individual equities offer tremendous upside, and return potential is not watered down as it can be within an ETF or mutual fund wrapper. This approach creates an incredibly powerful offering for the end investor, but the associated due diligence process on the advisor’s part for equity selection is time-intensive and cumbersome. We handle that for you.

Our team utilizes tools like Orion Advisor Services and Morningstar Office to identify individual companies and perform extensive research and due diligence on performance, managers, cash reserves and other fundamentals that drive their long-term potential. Our models are reviewed and rebalanced quarterly to ensure we are not over- or under-allocated to certain positions. The quarterly reviews allow advisors to stay on top of what their clients are invested in and ensure they keep within prescribed investment allocation targets.

Adding Value and Empowering Advisor Growth

Our asset management offering was designed with our advisors in mind. It is meant to streamline portfolio management processes and allow advisors to spend more time on planning and working directly with their clients. Some of the core benefits include:

  • A dedicated and responsive management team -GVA advisors enjoy direct access to our chief investment officer and his team of portfolio managers and investment professionals. In addition to scheduled quarterly conference calls where details are provided on recent investment decisions and market outlook, Lee makes it a point to be available to our advisors, answer questions from clients, offer his take on the latest events and act as a sounding board for concerns and questions.
  • Risk-minded and customizableBecause our team takes an active management approach, advisors can design a solution that meets the client’s goals while appropriately managing their risk tolerance. This is a significant value-add for high-net-worth investors. The process of customizing a portfolio needs to be responsive to the client’s risk appetite. We provide every office with a risk questionnaire that they can share with clients to assess needs, goals and outlook. The 15-question survey explores a client’s perspective on the markets, economic landscape and more. This survey produces a score that the advisor can use to assess overall risk tolerance and facilitate a follow-up conversation with the client.
  • Ongoing risk-mitigation measures -The risk questionnaire was strategically designed to provide a well-rounded view of client risk appetite and foster stronger communication between advisor and client. This is not a one-time activity, and rather it can be used repeatedly, allowing advisors to react to the latest newsflow and market changes and bring their client into the investment process. Since the election alone, we have seen double the questionnaires distributed to clients, empowering their advisors to keep a finger on the pulse of their risk tolerance and a step ahead of any changes.
  • Supportive of a holistic wealth management approach – Advisors on the GVA network share a common perspective on the importance of a holistic approach to managing their clients’ wealth. We are responsive to current events but maintain a long-term view, conducting appropriate research of investment opportunities and investing only in high-quality companies.

Lee Johnson provides his latest market commentary in real time and his door is always open for GVA advisors seeking his insight. Check the blog later this month for Lee’s reaction to this year’s events, his current outlook and perspective on 2021.In the meantime, connect with us on LinkedIn and Twitter for our latest insights and team updates.

Advice for RIAs to Manage Cybersecurity Risk in Today’s Environment: An Exclusive Q&A with Align Cybersecurity’s John Araneo

Cybersecurity continues to be an important focus for RIAs, particularly as more firms embrace the virtual and largely decentralized workplace, and both the SEC and the ODD community tighten the prevailing standards and expectations regarding properly safeguarding client data. Our team remains dedicated to providing the tools and resources you need to succeed, and we recently announced a partnership with Align Cybersecurity to keep our team up to date on the latest trends, innovations and news in the cybersecurity space.

The partnership provides us with direct access to some of the leading experts in cybersecurity, and we recently connected with John Araneo, the virtual Chief Information Security Officer of Great Valley Advisor Group. John is the Managing Director, Cybersecurity and General Counsel of Align Communications, Inc., a leading technology and advisory firm in the investment management industry, and he is a long-time investment management attorney and recognized cybersecurity expert. We are excited to leverage his experience for GVA’s benefit and the following post reflects a recent discussion with him in connection with GVA’s partnership with Align and its support of the GVA network, as well as his advice for RIAs. Here’s more from our conversation:

John Araneo, virtual Chief Information Security Officer of Great Valley Advisor Group, and Managing Director, Cybersecurity and General Counsel of Align.

How will Align support GVA and its network of advisors?

Align provides cybersecurity advisory services for investment management and other types of financial services firms. We maintain a specific focus on this industry, have direct lines of communication with the SEC, and work directly with the investor community and ODD firms. My team follows the emerging cybersecurity standards and frameworks and studies the relevant regulations, rules, risk alerts and enforcement actions. We are focused on keeping a finger on the pulse of regulatory changes and best practices recommendations with regard to cybersecurity compliance in the investment management space.

Cybersecurity is a top-line regulatory issue, as well as an operational due diligence focal point. Align takes a unique approach to cybersecurity, and we believe we have “cracked the code” in achieving cybersecurity compliance. Fundamentally, cybersecurity is a multifactorial challenge that requires a multidisciplinary response, and so from the outset, Align assembled an elite team of distinct subject-matter experts in three core disciplines of technology, security, and regulatory compliance. Through our approach, we think we can help investment management firms — whether small or large — satisfy the unique regulatory requirements they face, as well as meet the prevailing ODD expectations to create an appropriately-scaled model cybersecurity program.

How can advisors begin managing cyber risks to their practice?

Cybersecurity has proven to be a challenge across the financial services sector and affects all investment advisers, irrespective of size, notoriety, investment program and/or AUM. RIAs are generally well-acquainted with managing the more conventional and typical risks associated with their business – market risk, liquidity risk, operational risk and compliance are examples. Cybersecurity risk, however, is an opaque challenge for RIAs, largely because it requires at once: (i) a fundamental understanding of technology; (ii) an appreciation of the prevailing cybersecurity frameworks like NIST and ISO; and (iii) an awareness of what regulators have said constitutes a model cybersecurity program. So many RIAs simply don’t know where to start, and lack the time and resources to apply comprehensive understanding to cybersecurity best practices.

While it’s true that there are several core elements of a model cybersecurity program, advisors shouldn’t “DIY” this and should instead identify a partner who understands all aspects of cybersecurity. Fortunately, there are some great cybersecurity solutions out there that are easy to implement, such as employee education, centralizing your policies into a standalone cybersecurity policy, and basic email monitoring and logging. However, it can be overwhelming to navigate the seemingly endless solutions that are marketed to RIAs at rocket-speed. Through the all noise and rancor of everything “cyber,” we’ve observed that to really start gaining on the cybersecurity arms race, the first step is to conduct an initial Cybersecurity Assessment that identifies a baseline of your cybersecurity posture, and illustrates the strengths, weaknesses and any glaring omissions from your Cybersecurity Program. Once this baseline is identified, you can begin to set a cadence and take a methodical and responsible approach to mature the Cybersecurity Program over time, treating it as a process as opposed to a project.

What does a strong cybersecurity risk management strategy look like?

Cybersecurity risk management is complicated because there is a matrix of emerging standards, rules and regulations, laws and best practices to consider across the spectrum of all different industries and regions. Your firm’s approach ultimately depends on where you sit in the world, the technology and information you use, and the customers you serve, as well as your work-flows and data-flows.

With that in mind, for investment advisers, the SEC has charted out seven categorical requirements that each financial advisor needs to consider in designing a model cybersecurity program. We refer to these domains as the “Cyber Seven,” and they include (1) Governance and periodic risk assessments; (2) Data loss prevention; (3) Access rights and controls; (4) Mobile security; (5) Employee training; (6) Vendor management; and (7) Incident response.

While regulators have worked to identify these core areas as the loose anatomy of a Cybersecurity Program, they have not provided direction on how to prioritize these seven areas. There is no cybersecurity checklist, black-letter law, bright-line rules or a safe harbor. The best answer, however, is that a strong Cybersecurity Program is one wherein the RIA can demonstrate it is engaged in the process of understanding its unique cybersecurity risk posture and give a full throated, confident response as to what controls are currently in place and those which will be determined down the line, as the program matures.

What are common areas of concern you observe in small-to-mid-sized RIAs?

Although the Cyber Seven are not prioritized within a finite checklist, several of these elements are considered more pressing and fundamental than others. There are two common issues we observe among -to-mid-sized RIAs:

  1. Not having a centralized policy in place – Advisors need to be able to demonstrate the cybersecurity controls they have in place via a centralized policy. We often see policies distributed among a compliance manual, an employee handbook or other documents with orphaned, singular policies about email use, internet and social media use, document handling, or privacy. These various policy arms need to be centralized in one, easily accessible place.
  2. A disconnect between policy and action – While some firms have a singular policy in place, actually following its guidance presents new challenges. It can be difficult for practice leaders to confidently confirm they are adequately completing certain policies and tasks. For example, some mandates are rooted in technology, making it difficult for the manager to see its impact. Other mandates are operational in nature, leaving managers unsure whether their teams are complying.

Beyond these primary issues, we see firms falling short on employee education and implementing basic data loss prevention controls, including multi-factor authentication, encryption, and a defensible password policy.

What is your best advice for advisors regarding their cybersecurity measures?

The first step is to establish a baseline through a Cybersecurity Assessment that is completed by a credible, industry-specific advisor, specifically one which understands how RIAs operate, the underlying regulatory regime, as well as their investors and stakeholders. This provides a clear perspective on the things you are currently doing, as well as analysis into where there might be gaps. Without this baseline assessment, further action will be fruitless.

The cybersecurity phenomenon itself is still somewhat nascent, but there has been a huge upending of the risk management paradigm amid the pandemic, as more businesses are operating in a remote and decentralized environment. Prior to 2020, the available cybersecurity controls assumed the goal was to protect the centralized network and the data on it. As more employees work virtually, the focus has shifted to protecting the data at the end point, meaning the laptop or other devices you use for work. Your workforce is operating in different ways, and yes, that requires different technologies to allow employees and the firm to function, but it also requires different cybersecurity solutions.

Do you have anything else to add regarding Align’s support of the GVA network and focus on RIAs?

My team has been focused oncybersecurity since 2014 when the SEC held its first roundtable on the subject. We have seen that a lot of advisors initially took a defensive posture and procrastinated on this, and as a result, are largely unfamiliar with the idea of cybersecurity and all the pieces of it. For a long time, it remained unclear to many RIAs as to what they were investing money in and what they were going to get out of it.

The SEC has communicated to our team directly that RIAs can outsource certain core cybersecurity functions while maintaining proper regulatory and fiduciary duty responsibilities. The compliance function is a good example of this, as it is well known that the SEC allows RIAs to outsource the function of compliance, but not the responsibility. The SEC has taken the same position with regards to cybersecurity. To really hit the mark on cybersecurity and do what you are supposed to be doing, you need to find an advisor who understands what the asks are holistically — meaning not just from the technological perspective, not just from the compliance perspective or not just from a pure security perspective, but from a lens that encompasses all three aspects.

Many advisors think a cybersecurity program is a large investment, suitable for larger enterprises. We formed Align specifically to avoid that problem and provide a much more cost-efficient, effective and credible exercise for all sorts of smaller enterprises. There is a way to identify and design an appropriately scaled cybersecurity program for every advisor.

To learn more about recommended cybersecurity best practices for RIAs, read our recent blog post and connect with us on LinkedIn and Twitter.

Cybersecurity Best Practices for RIAs: Your Action Plan to Protecting Your Clients and Your Practice

In the last several years, investors have increasingly turned to virtual environments to engage with their professional partners, checking account balances, initiating trades and carrying out complex financial transactions all online. As the pandemic took hold, the trends shifted significantly toward an all-digital world, and it appears the RIA industry is embracing the new normal as well.

While the online environment offers many perks and efficiencies, it creates vulnerabilities among those who use it. In 2019, over 60 percent of compromised data originated in financial services organizations, according to research from Bitglass, a cloud security firm. This number has alarmed many, and the SEC is proactively working to mitigate the risk with increased scrutiny in its examination of financial services firms.

October is Cybersecurity Awareness Month, and the Cybersecurity & Infrastructure Agency-sponsored initiative presents the opportunity to assess your cybersecurity plan. Advisors need to take action to protect their practices and their clients, and there are some basic steps advisors should follow to ensure they are well prepared.

  1. Establish policies and procedures – RIAs must establish specific rules and requirements for staff around cybersecurity measures, including what team members should and should not do with regard to data. This cybersecurity guide should be customized to the firm and include checklists and best practices for the team’s standard workflow and any specialized needs. The rules and procedures for a small shop that relies on administrative staff for support will look quite different than for a larger team with dedicated client-facing personnel. However your team decides to manage the policies, it is smart to provide a copy for all team members so they have quick access moving forward.
  2. Assess your third-party vendors – It is not enough to have your own policies and procedures in place; RIAs need to assess the processes their partners and vendors follow too. Part of the vetting process should include a vendor review template that touches on key areas including the following: Has the vendor completed penetration testing? Have they experienced a data breach? Do they have cybersecurity certifications? Do their emails use proper encryption? Who has access to the data? How is the data protected? Advisors must take care to assess these high-level risk factors before engaging with an outside partner.
  3. Educate your team (and do it often) – Even the most iron-clad plans can be compromised by simple human error. Often, data breaches and security threats come down to phishing emails or scams and personnel who don’t know what to do. Even seemingly innocuous practices — like setting up your laptop in the local coffee shop while waiting for a meeting or leaving your computer unlocked while you run to the office kitchen — can create significant risk for the firm. It is essential that your team is smart about daily business activities and remains updated on the latest threats.
  4. Assess your vulnerabilities with stress testing – Any firm can go through simple cybersecurity training and check a box. However, the firms that will be most successful in protecting their clients and their practice are those who undergo stress testing and realistic data breach simulations. For example, conduct random phishing attacks and penetration testing to identify vulnerabilities and address them in real time. In addition, look for a partner who can provide guidance on what other RIAs have experienced and how they have successfully adjusted their approach to safeguard their data.
  5. Have your post-breach action plan ready – While the above steps will help mitigate your risk of a cyberattack, the reality is data breaches happen to even the most prepared among us. RIA practice leaders need to have an action plan that’s leveraged in the event of a data breach. This includes a detailed outline of next steps, specifically how the system is disabled; a communication timeline for alerting partners and clients; contacts at your technology and security partners; and more. It can even go as far as detailing client-facing offerings like credit monitoring services to help clients feel safe following an attack.

Don’t Forget to Share With Your Clients

Creating a cybersecurity action plan is an essential business practice in today’s environment, and the moves you take to protect your firm matter to your clients too. They want to know you are taking every precaution to safeguard their information and data. Let them know the work your firm is doing to educate and train the team, how you are vetting vendors and partners, and what your plans are in the event of a security breach. Such action adds value to your relationship with clients.

Our Commitment to the Network

Technology has become central to our lives, and as more people work remotely and conduct daily activities online, the network will become overwhelmed. It is essential to partner with a cybersecurity organization that can protect you as hackers become more sophisticated and adapt to our current environment. You want to feel confident that you have the right partner to support your firm. 

Our team recognized an opportunity to fortify our cybersecurity practices, and within the last year, we began the process of reviewing different cybersecurity partners. Clients trust us with their most confidential information, and it is critical that advisors are confident in their ability to keep this data safe. We ultimately decided to engage with Align Cybersecurity, the premier global provider of technology infrastructure solutions, to keep our team up to date on the latest trends, innovations and news in the space. We are dedicated to sharing this information within our network so you are equipped to make informed decisions for your practice too.

We are continuing to spotlight the importance of cybersecurity during Cybersecurity Awareness Month and beyond. Be sure to check back for an exclusive Q&A on our blog with John Araneo, our virtual Chief Information Security Officer and Managing Director, Cybersecurity and General Counsel of Align. In the meantime, connect with us on LinkedIn and Twitter for our latest insight and team updates.