As more wealth management firms trade in their licensed software for cloud-based digital technology solutions, those that haven’t made the switch are understandably eager to find out more about the cloud and the benefits it can provide.
However, before beginning due diligence on providers of cloud-based solutions, they need to first understand which type of cloud is the right one for them. Even among IT experts, the term “cloud” can mean different things to different people. The cloud isn’t just “the cloud”—there are public, private and hybrid clouds, and they work in different ways. RIAs and broker-dealers have to identify which cloud is the right choice for their individual practice at the start of the process.
The Public Cloud
Public cloud platforms are owned and managed by technology vendors that provide cloud services to multiple clients through a pay-as-you-go arrangement. Using a public cloud is like buying your own computer or server, but in this case, it resides in a data center instead of in your home or office.
Public cloud systems can decrease the expense of maintaining an IT infrastructure for wealth management firms because they only have to pay for what they use, and are given on-demand access to a wide variety of resources that they need as they grow. However, since the same services are available to all users of a public cloud platform, this type of solution may fall short of a firm’s cybersecurity or compliance requirements, and the applications that are provided to users may be too limited in scope to properly service a client base composed of diverse investors.
Furthermore, public cloud systems are generally encrypted with a key that only users possess, which means that the cloud providers can’t access customer data. While this may seem reassuring, it can also be very inconvenient because without access to a user’s data, the system provider can’t troubleshoot or manage any IT problems that crop up in the user’s virtual servers and workstations.
The Private Cloud
In contrast to public clouds, private cloud systems are designed to be used and maintained by only one organization, making them more customized and secure solutions over which users have greater control. The advantages of private cloud platforms include the capability to easily track the location of all data across an organization, and implement stringent security standards and controls to protect the data. RIAs and broker-dealers can also move legacy software to the cloud without extensive programming alterations using this type of system, as well as configure specific user-access controls and desktop views for employees in different divisions.
The initial outlay required to set up a private cloud system can be a bit steep, especially for small and mid-size wealth management practices, but if it is configured optimally, the operational efficiencies, greater security and other advantages will likely outweigh the setup costs.
While private cloud systems can offer significant benefits over their public counterparts, the former require users to devote considerable long-term financial and manpower resources. If a wealth management firm doesn’t have an internal team of IT professionals who can build and maintain a private cloud platform, then this undertaking can not only be very expensive, but can also place the practice at risk of becoming distracted from its core competencies and responsibilities, namely servicing clients and helping them reach their financial goals.
The Hybrid Cloud
In recent years, hybrid cloud platforms have emerged as options that can enable wealth management firms to incorporate the best attributes of public and private cloud computing. They can use private clouds to access proprietary applications that require high security to protect sensitive client data, and also reduce costs by using public clouds for services over which they can give up control, such as email.
However, like private cloud systems, hybrid cloud platforms require a strong IT team in order to successfully complete setup, integration and maintenance. Hybrid solutions, though, call for a higher level of IT expertise because they involve configuring and integrating multiple cloud-based systems and applications.
The Outsourcing Alternative
If RIAs and broker-dealers don’t have the resources to hire IT professionals who can not only anticipate and manage configuration and integration problems, but also optimize their organizations’ overall use of cloud software, they can still reap the benefits of private and hybrid cloud systems by outsourcing their cloud-based system’s implementation and maintenance to external specialists.
Third parties that possess expertise in both financial services and technology can either take control of managing a wealth management firm’s cloud platform, or migrate the firm’s applications and data to proprietary cloud-based systems that they manage remotely. Both options can give RIAs and broker-dealers the opportunity to optimize their practices and serve clients better through cloud computing, while secure in the knowledge that IT experts are working with them to ensure sensitive client information is safeguarded, and cybersecurity regulations are being met, over the long term.
Choosing an Experienced Partner
Wealth management firms that wish to outsource the management and maintenance of a cloud-based system should make sure any prospective vendor is well-versed in SEC and FINRA policies as well as developments at large banks which can have an impact on independent financial advisors. They should also check that any third-party IT partner adheres to strict internal audits of all procedures, and has a proven track record of enhancing cybersecurity while also improving operations for wealth management businesses.
Other criteria for evaluating potential IT partners should include solutions’ ease of use, cost-effectiveness, and online safeguards. Wealth managers should also look to see if a provider builds SEC/FINRA-compliant capabilities and security requirements for sensitive client data into their systems, which make ongoing updates a seamless process.
Your Choice Depends on Your Practice
Every wealth management practice is unique. The type of cloud computing solution you choose must be the one that best aligns with your practice’s clients, resources, expertise, business model and goals. Before following other firms into the cloud, you need to carefully analyze the three types of clouds, and how each one may (or may not) benefit your practice over the long term.
Justin Kapahi is Vice President of Solutions and Security at External IT, which provides the workplace wealth solution, a secure digital hub designed to help financial services organizations operate more efficiently and manage all their compliance and cybersecurity needs as they grow.
