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Asset Management

02:15 PM
Kent Costello
Kent Costello

Automating the Institutional Investing RFP

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

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

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

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

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

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

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

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

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

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

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

Kent Costello is Co-Founder of InHub LLC. Prior to forming InHub, Kent worked as an investment consultant for the institutional arm of Morgan Stanley, Graystone Consulting, and as Vice President of an independent investment consulting firm where he focused almost exclusively ... View Full Bio
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