Welcome to Financial Advisor IQ
Follow

Is the Cloud a Safe Place for Client Data?

By Chris Latham April 11, 2013

On a scary day in 2005, the office of McIntosh Capital Advisors was nearly burglarized in broad daylight, until staff shooed off the would-be intruder at the last minute. A few years later, fire broke out in the firm’s building in West Los Angeles. Last July an areawide power outage all but wiped out its hard drives. The last ordeal was the one that convinced Alfred McIntosh he should move client data into the cloud.

“I had put it off too long,” says McIntosh, whose firm manages $30 million for about 100 clients. “There are just too many risks to having information stored in your office.”

In the age of high-powered hacking, advisors must figure out how to keep client data safe. Mega financial institutions from commercial banks to the Federal Reserve have been breached over the past year, in highly coordinated attacks.

But choosing the right protection takes some homework.

Advisors and tech experts recommend using only vendors that abide by government standards and industry protocol. These include housing servers in multiple physical locations, encrypting data, doing deep background checks on the (very limited number of) individuals who have access, and mounting surveillance cameras. And many advisors consider it a best practice to inform clients when moving data to the cloud.

Annual fees for cloud storage range from just under $500 to well over $100,000, depending on features and capacity.

Welcome to the Future

Not all advisors go through what McIntosh endured before switching to the cloud. Ted Rich of Vinoy Capital started using software by Florida-based Black Diamond in 2007, when he was in the process of merging his practice with another firm. During that restructuring the team decided that their performance reporting process for clients needed upgrading.

“It was kind of archaic,” Rich says. “We saw that printing and faxing and shuffling paper was not the future.”

Orlando-based Vinoy Capital, which manages $200 million for about 180 clients, has stuck with Black Diamond since then. The system allows advisors and clients to analyze portfolios and has an iPad app. The software facilitates reporting on client holdings, benchmarking against indices, client billing, and assorted back-office tasks.

According to Michael Golaszewski, head of product development for Black Diamond, “What anybody should ask when you’re looking at a software provider or cloud provider is, how is my data going to be secured?”

Online data storage for financial information is regulated by the Federal Trade Commission and the SEC.

“If a third-party vendor’s cloud cannot adequately meet strict compliance requirements and ensure that data is safe and secure, a client’s private information can be severely compromised,” says Karen Jaworski, senior director of product marketing at EVault, a San Francisco firm that manages online backup and cloud storage services for industries including regional banks and credit unions. “The cloud is secure, there’s no question, but not all clouds are fail proof.”

Client Access

John DeVincent, executive vice president of marketing at eMoney Advisor, another cloud storage provider, warns that pedigree is vital when weighing which vendor to select. Credentials include vendors that boast SSAE-16 standards, SOC-2 compliance, and VeriSign approval.

“You don’t know if these are three guys out of a garage, and now you’re putting client-sensitive data in that.”

DeVincent said that eMoney Advisor, which was founded in 2000, has never been successfully hacked. Golaszewski said he could not recall Black Diamond suffering a client-data breach in at least the last year. Jaworski was unable to comment on whether EVault had ever suffered a similar breach.

McIntosh had tested eMoney Advisor but decided against it because he felt it was a bad fit for his team’s financial planning needs. That was before the power outage. Now he is testing out other cloud-based tools, including the low-cost online backup provider Mozy.

McIntosh anticipates that some of his older clients will resist. “For some, there is nothing you can say to make them feel completely confident,” he says.