How Offering "High Touch" Bill Pay Services Can Help RIAs Differentiate

Learn how RIAs can offer value-added bill pay services to their HNW clients while maintaining regulatory compliance

By The Rudin Group with contributions from MarketCounsel Consulting

In the past, registered investment advisers (RIAs) could rely on an identifiable brand image and strong investment performance to appeal to prospective and current high-net-worth (HNW) clients. However, wealthy investors increasingly want more from their wealth managers. In fact, 43% of the HNW individuals (HNWIs) surveyed for Capgemini’s 2020 World Wealth Report said that they believe additional services would positively impact their experience with a wealth manager.[1] This hunger for value-added offerings was most pronounced among ultra-high-net-worth (UHNW) individuals under age 40, with almost half of those surveyed interested in such services and 80% of those interested willing to pay for them.[2] It’s no wonder that the Capgemini report deemed value-added services as one of the ways forward for advisors looking to bolster revenue amid uncertainty and safeguard their client base.[3] One such service is bill pay. Given the complexity of many HNWIs’ financial affairs, offering bill pay to clients is a great way for RIAs to increase their value, thus solidifying the advisor-client relationship.

How RIAs Can Differentiate Themselves from the Competition

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Competition is a double-edged sword for RIAs, as it is for professionals in many industries. On one hand, 23% of respondents to Schwab Advisor Services’ 2020 Independent Advisor Outlook Study cited “new forms of competition” as among the top three biggest barriers to growth in the RIA industry over the next five years, and another 16% said that the ability to differentiate from competitors is among the top three barriers.[4] Yet the RIAs surveyed also viewed competition positively as well. Indeed, 35% of the 1,300 independent advisors who responded to the survey felt that differentiating themselves from the competition was among the top three biggest opportunities for their businesses in 2020 due to COVID-19.

Offering bill pay services that leverage an automated solution like Bill.com can be a new differentiator for RIAs. There are just a few things you will need to adhere to, so as to ensure that you maintain the appropriate risk controls and regulatory compliance rules.

RIAs’ need to differentiate of course did not start or end with the COVID-19 pandemic. However, whereas being able to leverage technology and connect with clients virtually have been key differentiators during it, those same differentiators will become less important as things “return to normal” and advisors resume face-to-face meetings. And research shows that most of the wealth management industry will. Although 80% of respondents to a July 2020 Redtail Technology survey of financial advisors and their staffs used video/remote conferencing to connect with clients in 2020, the vast majority (86.7%) said that they still believe that in-person meetings, when available, offer the highest client engagement.[5]

Furthermore, with 80% of respondents using this technology, the ability to connect with clients virtually becomes not so much a differentiator but the norm. RIAs thus need a new way to differentiate – a new way to provide added-value to the advisor-client relationship, especially among HNW clients. Offering an automated bill pay solution like Bill.com can be this new differentiator for RIAs. There are just a few things you will need to adhere to, so as to ensure that you maintain the appropriate risk controls and regulatory compliance rules.

What the SEC’s Custody Rule Means for You

Some RIAs may fear providing bill pay for their high-net-worth clients out of the worry that doing so would be subjected to the Securities and Exchange Commission (SEC) oversight. This fear stems from the SEC’s Custody Rule, which is designed to help ensure that clients’ funds are protected. This Custody Rule defines custody as “[a]ny arrangement (including a general power of attorney) under which [an advisor is] authorized or permitted to withdraw client funds or securities maintained with a custodian upon [its] instruction to the custodian.”[6]

In other words, any time RIA firms have custody of clients’ funds – meaning that they have the ability to directly or indirectly access these funds – they need to ensure compliance with the Custody Rule, explains Daniel Bernstein, chief regulatory counsel at MarketCounsel Consulting. One such possible scenario is when an investment advisor provides bill paying services for a client. Advisors who are currently not offering bill paying services because of their concerns of violating the Custody Rule and its implications may want to reconsider. “It’s an easy rule to follow, and there’s a really well-worn path on how you need to do it,” Bernstein says. Unlike some regulatory areas where compliance is more confusing and best practices tend to “jump around,” how to offer compliant bill pay services is “right in the rules,” he explains.[7]

Don’t Be Afraid of the “Big, Bad Exam”

Maybe it’s due to enduring trauma from “big test days” at school, but for many people the idea of having to a surprise exam is akin to going to the dentist for a root canal. Yet the surprise annual exam required for RIAs who offer bill pay services is likely to be much less painful than that root canal – seriously. One important distinction is that the exam is just that – an exam; it’s not an audit, a word that tends to strike the most fear in people’s hearts. Plus, RIAs can use the fact that the exam was done and that these regulations exist to build client trust, according to April Rudin, founder and CEO of The Rudin Group, a wealth management marketing firm. “RIAs can tell clients, ‘Here's what we're doing to protect your assets,’” she explains.

For example, Bill.com – a leading provider of cloud-based software that simplifies and automates complex, bill pay operations for small and mid-sized wealth management businesses – has internal controls to help make these surprise exams easier and less manual for both the accounting firm doing the exam and the RIA firm whose practices, policies, and

Bill.com has the internal controls necessary to help make these surprise exams easier and less manual for both the accounting firm doing the exam and the RIA firm whose practices, policies, and accounts are being examined.

accounts are being examined. Bill.com has timestamps and audit-ready trails, and provides access controls that allow firms to provision users based on their role (e.g., an auditor). This helps firms limit access to those who truly need it.

Although the surprise exam is nothing to fear, as long as the firm has the policies and procedures described earlier in place, choosing an accounting firm to conduct the exam is a decision that should not be taken lightly. It’s essential to find the right accounting firm that meets the firm’s needs and budget, according to Bernstein. Fortunately, the exam cost is fairly reasonable, so it should not be cost prohibitive. It is most important to find an accounting firm that is familiar with this type of examination; this could be an accounting firm that is registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board (PCAOB), but PCAOB registration is not required for this exam. The exam is not especially common, and you don’t want someone to learn on your engagement,” he says.

How An RIA Firm Can offer bill pay services and maintain regulatory compliance

RIAs need to have internal policies and procedures in place for their bill pay services, according to Bernstein. There is no regulatory rule to turn to that prescribes what these policies and procedures should be. “The great thing about the Custody Rule and the Investment Advisers Act of 1940, in general, is that the SEC allows flexibility depending upon the facts and circumstances,” he says. In setting their own policies and procedures, RIAs’ end goals should always be to protect client assets and mitigate risk. Fortunately, there are a number of best practices that firms can put in place that accomplish both objectives. These are:

1)?????Document everything. That includes the authority to have access to the client’s assets, each bill, the approval to pay each bill (either internally or from the client), the confirmation of payment, the training done for staff, and finally all review and testing.?

2)?????Put checks and balances in place, whenever possible, and test your processes. “Testing is also an integral part of compliance.?Someone who is not involved in the bill paying should test the effectiveness of the process, including reviewing the validity of at least a sampling of paid bills,” Bernstein says.

3)?????Limit access to the bill pay service to those professionals who truly need it. Only members of your firm who are actively involved in the bill pay offering or testing the process should have access to it. Additionally, when possible, there should be checks and balances in place and a clear separation of duties, so that the person creating a bill and paying a bill are never the same.

4)?????Train staff on their bill pay-related duties and the regulatory responsibilities of the firm. All staff should be aware of what they can – and can’t do – based on their role, the SEC’s Custody Rule, and why compliance is so important. ?If something does not look right, staff should say something.

5)?????Have an accounting firm do a surprise annual exam. The first examination must be done within six months of the firm becoming subject to the requirement. After that, the examination must take place annually. The examinations must be done “by surprise,” meaning that they could take place shortly after engaging the accounting firm, or at the end of the time period.?The accounting firm determines the date.?

The Advantages of Offering Bill Pay

Offering bill pay to your high-net-worth clients has many advantages for RIAs. Wealthy clients increasingly expect more for the fees they pay to their investment advisors. In fact, nearly one-third of the HNW individuals (HNWIs) surveyed for Capgemini’s 2020 World Wealth Report said they were “uncomfortable” with the wealth management fees they paid in 2019.[8] And 22% of

Wealthy clients increasingly want more “bang for their buck.” In fact, nearly one-third of the HNW individuals (HNWIs) surveyed for Capgemini’s 2020 World Wealth Report said they were “uncomfortable” with the wealth management fees they paid in 2019.?And 22% said that they plan to move their money in the next 12 months, with high fees cited as the top reason.

the HNWIs surveyed said that they plan to move their money in the next 12 months, with high fees cited as the top reason for the move.[9]

One way that RIAs can potentially increase client and prospect satisfaction is by offering more value-added services like bill pay. Consider this: the more an RIA becomes a “one-stop shop,” the more indispensable they become to the client. It’s one thing to have to find a new financial advisor; it’s a whole other ball game to have to find someone who can both provide you with financial advice and handle your complex bills. Many HNWIs have multiple foundations, trusts, properties, and businesses, which means they have many more bills to track, pay and record than the average person. This complexity makes the RIA who also offers bill pay services all the more indispensable.

Best Practices for Offering Bill Pay Services

If you are considering whether to add bill pay services to your advisory business, you may want to weigh the costs of providing such services against the benefits. Some factors to keep in mind are:

·????????The number of clients that potentially would be interested in bill pay services.

·????????The “return” of offering these services both in terms of the fees that you would charge and the benefit of strengthening the advisor-client relationship.

·????????The internal risk controls and policies that you would need to create.

It’s important to keep in mind that adding adequate risk controls and procedures doesn’t mean you necessarily have to “recreate the wheel” – so to speak; rather, there are a number of relatively simple best practices to consider:

·????????Fully understand the SEC’s Custody Rule and how it applies to you: When considering how the rule applies to your business, some questions to ask are: 1) Is your authority to have access to client assets limited to a standing letter of authorization to pay bills for a designated third-party??If so, review the SEC’s no-action guidance, according to Bernstein.?2) Or does the authority allow you to pay any bill? Then, this can help you determine if you must follow the Custody Rule requirement to have a surprise examination by an accounting firm.

·????????Limit access to the assets: Bill.com provides access controls that allow firms to provision users based on a specific role (e.g., approver, clerk, administrator, accountant).

·????????Document all money movement: This documentation is crucial, particularly if a question arises from a client or from the accounting firm performing the annual exam.

·????????Put checks and balances in place (with clear separation of duties): The person who creates the bill should not be the one who pays the bill. Bill.com’s wealth management offering allows a firm to set up pre-determined approval workflows to automatically route bills to specific approvers.

·????????Have someone not involved in bill paying test your processes and review a sample of paid bills: Having someone from within your organization but not involved in client bill pay perform this check helps the organization gain an “outside perspective” of the processes, including any potential problem areas. Aim to perform the first internal check soon after your organization starts offering bill pay. That way, the organization can address potential problem areas before an accounting firm does the first surprise exam. Then, perform these internal checks routinely to quickly identify and address new or potential issues as they arise.

·????????Reduce the potential for fraud, particularly phishing and identity theft: Bill.com provides six categories of protection to help safeguard an RIA clients’ money and sensitive information. These include application protections, such as sending login data over a secure channel; payment protections; network protections including network monitoring to help prevent unauthorized electronic access to its servers; data protections such as an additional layer of encryption; physical protections, including hosting its servers and network infrastructure at secure data center facilities; and compliance protections, including partnering with a PCI-certified vendor for credit card payments.

·?????????Train your staff and document that the training was done: Be sure to train your staff about the risks involved, what they are allowed to do and, more importantly, what they are not allowed to do, according to Bernstein. “This is a big risk area for the firm and its clients.?Make sure staff understand the importance of following the policies and procedures,” he says.

The Bottom Line

Offering bill pay services can be a key differentiator for RIAs, especially those who serve HNW and UHNW clients. Wealthy clients increasingly want more for the wealth management fees that they pay and will move their money if they don’t feel those fees are justified. At the same time, they want value-added services like bill pay and are willing to pay for it. Consequently, by offering this service, RIAs can provide the added-value that clients want and make the advisor-client relationship “stickier.”

The more an RIA becomes a “one-stop shop,” the more indispensable they become to the client.

When deciding whether to offer bill pay services, RIAs should consider whether the benefits of greater client and prospect satisfaction and “stickier” client relationships outweigh the costs of the surprise annual exam and potential liabilities. However, they should not get discouraged, either. As with any new process, implementing bill pay services can feel overwhelming at first, but it can become more streamlined over time, especially as the return-on-investment becomes clear. Remember: the more an RIA becomes a “one-stop shop,” the more indispensable they become to the client.

[1] https://worldwealthreport.com/wp-content/uploads/sites/7/2020/07/World-Wealth-Report-WWR-2020_Final_web.pdf

[2] https://worldwealthreport.com/wp-content/uploads/sites/7/2020/07/World-Wealth-Report-WWR-2020_Final_web.pdf (HNWIs are those with $1 million or more in investable assets; UHNWIs are those with $30 million or more in investable assets.)

[3] https://worldwealthreport.com/wp-content/uploads/sites/7/2020/07/World-Wealth-Report-WWR-2020_Final_web.pdf

[4] https://www.aboutschwab.com/schwab-independent-advisor-outlook-study-2020

[5] https://corporate.redtailtechnology.com/redtail-technologys-working-remotely-2020-survey/

[6] https://www.sec.gov/investment/im-guidance-2017-01.pdf

[7] For more on the SEC’s Custody Rule, see https://www.sec.gov/rules/final/ia-2176.htm#IIA

[8] https://worldwealthreport.com/wp-content/uploads/sites/7/2020/07/World-Wealth-Report-WWR-2020_Final_web.pdf

[9] https://worldwealthreport.com/wp-content/uploads/sites/7/2020/07/World-Wealth-Report-WWR-2020_Final_web.pdf