Tech Audit LLC

What Every Investor “Should Know” About Investment Industry Technology

Deborah was interviewed on ExperiencePros.com on KLZ 560 AM and here are some of the questions/answers/issues she discussed:

Why would/should we care about the technology behind our investments?

It is really easy to think that technology is like an on/off switch. It is either ON (working) or OFF (not working), and that all you need to concern yourself with, as a consumer, is that the company that handles your investments 1) knows what they are doing and 2) has uptime during market hours. If those two elements are covered then you don’t have anything to worry about. Right?

Not quite. While it should not be an expectation that you have a programming degree, and it would be inappropriate for you to have access to all of the proprietary code that is used at the firm, there is more to the technology that runs the investment tools than just the ON/OFF. Also, many times, the client/investor is talking to an investment advisor and it is not uncommon that they do not fully know whether or not the technology is working correctly at their firm. After all, if something is “broken” is it likely that the technology department “wants to” go running to the advisors who deal with clients and give them the “worst case scenario?” It is more likely that they will spend their time trying to fix it than to enlighten the advisors prematurely.

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But, the issue actually goes deeper than that, and really requires that the investment management team, upper management, and advisors truly understand the technology that is running their firm, and, it is not uncommon that they do not understand it because they have not had the opportunity to be educated to understand it and know what to expect.

How does this affect me, since I don’t use a Private firm for my investments?

If you invest money at all, you have the potential of having this issues. There are two primary categories of issues that come to mind, though there are plenty more, but that would go beyond this short article.

• Disaster Recovery / Business Continuity
• Portfolio Management

Both of these categories would be affected even if you are investing your money through another larger firm, neighbor, anyone. Eventually, that money is going to be affected by the existence (or non-existence) of a business continuity plan and the portfolio management software that handles your portfolio and client data reporting.

I don’t invest anything, should I really care about this topic?

It is my opinion that you should care about this topic, even if you do not invest anything at this point. While I am not licensed to give you information on HOW to invest, if you are reading this, you probably have some passing fancy and interest in investing. And, if that is the case, it is good for you to know potential pitfalls before you run into any trouble.

How do I know if I’m at risk?

Just as in life, there is always a risk of stubbing your toe, investing money has its own set of risks. If you are talking technology, the best thing that you can do is to be informed. I would expect anyone to go get a technology degree, and, as I mentioned earlier, even that would not entitle you to the information behind-the-scenes anyway. So, instead, arming yourself with the questions to ask your advisor and investment team, is a first step in the right direction to minimizing that particular risk, or at least knowing what you are up against.

What can I do, as a consumer, about this?

Ask Questions!

Keep in mind that it is very likely that the person you are speaking to (i.e. Your Financial or Investment Advisor) may not know the answers to these questions and may be sincerely answering what he or she understands to be the case. The best option, when it relates to technology, is to ask for the person in charge of technology. You do not want to speak to the technology support person, but the person who is actually responsible for the technology decisions, and is a technology person. That is very “key” in getting the answers that you are looking for, to protect your assets. There is no problem with having your advisor present, or anyone of your choosing, but you really want to go to the “source” when it comes to technology.

Portfolio Management

Here are some example questions to ask about Portfolio Management (Client Data):

1. How is the data recorded (automatic or manual)
2. Does the firm use Electronic Trading? If so, how is it reconciled?

Disaster Recovery

Here are some example questions to ask about Disaster Recovery:

1. Does the firm have a business continuity plan (BCP)?
2. How often is the business continuity plan updated
3. How often has the plan been tested?
4. What sort of things are covered by the BCP?
5. Is there a diagram/flow chart available to show how data is handled during a disaster?
6. When was the last time that the plan was audited by the SEC or an outside auditor?
7. Is there any requirement by the SEC for disclosure of technology-related issues?
8. KEY QUESTION: What are the results of the last BCP/DR Test?

Why is this one the most key? If the response is that everything tested well, like 100%, ask more questions! There should always be room for improvement, even if it is timing in the failover/failback, call tree, etc. If everything is “A Ok,” I would wonder if the firm was giving the full story and whether or not the person answering the question is truly “in the know.”

There are many more aspects of the technology behind the financial systems that should be of interest, great interest, to the consumer, but this is a good place to start.

For another article discussing some of the financial industry related issues that concern Deborah, and specifically relating to the technology that supports the industry, check out her article, Are The NASDAQ Systems up to it? at byapaar.com.

You can listen to the archived radio show at Radio Show Archive.

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