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Technology Disasters Can Destroy FA-Client Relationships

September 3, 2015

If you’ve never experienced a computer crash or lost digital files, you’re a lucky person. It’s only a matter of time for most independent advisors, including RIAs and indie broker-dealers. Nobody likes to think about it, but disasters strike. Hurricanes trigger power outages and knock down buildings. Cyber terrorists hack accounts to steal or delete information. Old servers break down.

Whatever the case, advisors must be able to swiftly recover data and restore operations. All firms should take that to heart. An RIA’s reputation is its most valuable asset. Partners whose firms manage hundreds of millions of dollars risk reputational ruin if they cannot answer clients’ most basic question during an emergency: “What happened to my money?”

RIAs with strong disaster-recovery systems and business-continuity plans can answer that question with the world’s best answer: “It’s safe.” Firms that have upgraded from local office networks to cloud-based platforms go through less stress than ill-equipped rivals.

Save Digital Data; Save Your Company

Advisors should think of disaster-recovery systems as the technology-facing subset of business-continuity plans, which address the entirety of a company. For example, if an earthquake damages buildings in Los Angeles, RIAs located in the city could enact their disaster-recovery systems to keep their software operating and business-continuity plans to keep their employees working. Or if a prolonged power outage hits office buildings on a day the stock market plunges, an RIA might have a disaster-recovery plan that lets advisors access their online trading platform from afar. Further, such business-continuity plans will help managers communicate with staff.

Disaster-recovery systems allow firms experiencing computer-server failure to regain use of programs without significant data loss. Business-continuity plans allow firms that have lost access to property or employees to stay up and running despite diminished resources.

Under Rule 206(4)-7 of the Advisers Act, the SEC requires RIAs to have written business-continuity plan documents on procedures during a disaster, since maintaining service is in their clients’ fiduciary interest. Rule 204-2 calls for safeguarding firms’ electronic data. RIAs violating these rules risk disciplinary action or client litigation. Someone at the firm, like the COO, should be responsible for implementing disaster-recovery systems and business-continuity plans. If a firm has a chief technology officer, that professional could handle the disaster-recovery system.

Wall Street vs. Hurricane Sandy

One key reason for independents to take IT security seriously concerns keeping up with their main competition: wirehouses and regional brokerages. Days before Hurricane Sandy devastated the Atlantic Coast in October 2012, Wall Street firms initiated business-continuity plans. Their tech teams designated business-continuity plan coordinators on each team who informed colleagues how to handle the storm. The coordinators passed out wallet-sized cards listing safe locations to regroup and contact information for essential personnel. Most Wall Street firms didn’t rely on local IT systems, so Wall Street hardly stopped working.

Rise Above Hardware With the Cloud

Proactive firms use advanced cloud-based platforms, which consist of servers housed in multiple data centers in various geographically dispersed locations. The process of “virtualization” alleviates the pain of relying on hardware, by creating an operating system that functions independent of any particular device. This all but eliminates the risk that a physical event affecting a single geographic area will cripple a firm’s IT system.

Disaster-recovery systems achieve this goal in two ways. If something goes wrong at a firm locally, data is automatically safe from loss because it’s in the cloud. And if something goes wrong at a data center itself, an immediate “failover” occurs, so the information is automatically shifted to another server. People using programs would notice only a few seconds of slowdown.

Prepare for the Unknown

Ultimately, advisors can’t be expected to predict and prevent all the ways disaster could strike firms. Thankfully, they can employ business-continuity plans that increase the probability of keeping service up for clients when chaos erupts. In an age when technology makes or breaks firms, disaster-recovery systems protect client data and the firm’s reputation from threats both physical and digital.