Financial Planners Outsource Their Back Office Support Staff to Home-Based Workers

Posted October 16, 2009 by   · Print This Post Print This Post

Summary.

Suddenly, outsourcing benefits come to financial planners. But reports of the advantages may be too good to be true.

What is Outsourced, and to Whom.

In a lead article, The Wall Street Journal announced in April 2003 that a small number of financial planner are adopting an outsourcing model in their business, hiring “independent contractors” to manage tedious tasks. Such tasks might include:

  • credit checks and reference verifications for new clients;
  • data entry for investment statistics and record keeping;
  • cash flow analysis;
  • retirement planning strategy;
  • preparation of financial plans.

Rationale.

Financial planners who outsource such back-office business processes claim that it allows them to devote more time to their basic business of consulting and counseling. The independent contractors, most of whom work from their homes, need little training to perform the functions, yet the outsourced functions are the time-intensive components of financial planning.

Legal Issues for Home-Based Workers.

Many issues arise in outsourcing to home-based workers.

Employment Relationship (vs. Consulting Relationship).
The Internal Revenue Service has proposed a list of 20 questions used to determine whether an individual who is a service provider is an employee or an independent consultant. Properly structured, the relationship can be proven to be independent, thereby saving the customer (financial services planner, for example) in Social Security and Medicare taxes.

Negligent Selection and Recruitment.
In an employment relationship, the employer is potentially liable under the tort theories of:

  • respondeat superior (vicarious liability for the tortious acts of one’s employee) or,
  • for certain intentional misdeed by the employee, negligent selection and hiring without due diligence.

In an outsourcing context, virtually the same principle applies because the financial planner is liable as “general contractor” for the mistakes of the subcontractor. But, unlike an employment relationship, the contractor (financial planner) is generally not liable for malfeasance or intentional conduct of the outsourcing service provider.

Pension Plans and ERISA.
If the financial planner is deemed to be an employer, then the outsourcing services provider might be deemed covered by the Employee Retirement Income Security Act of 1974. Any pension, medical or profit sharing plan of the financial planner might have to cover the services providers, under penalties for any failure to comply.

Accidents on the Home Front.
Financial planners or others hiring home-workers should identify the respective liabilities of the parties in case of any accident while the home-worker is engaged in performing services. This is potentially a greater risk for an employer than an outsourcing customer, but it poses risks to both.

Confidentiality.
Any outsourcing transaction should be governed by appropriate confidentiality commitments to protect the information of the financial planner. But this raises a question whether the financial planner’s client is willing to have such subcontractors see the relevant confidential financial information.

Client Engagement Letter.
Accordingly, if third parties are to receive and review confidential or proprietary information, the client must approve the process. This principle applies, as a statutory requirement, in case the financial planner is affiliated with a financial institution under the Graham-Leach-Bliley Act or if the information includes confidential medical information protected by the Healthcare Improvements Portability and Accountability Act of 1996.

Management.
The financial planner will still need to manage the service provider. The costs and time of such management can be high if the financial planner does not have a well-organized plan of his or her own to use appropriate collaboration tools and review the work done by the service providers.

Best Practices.

The best financial planners who outsource any function will follow the rules set forth above. In addition:

Web-Enabled Collaboration.
Outsourcing customers, having learned the uses of e-mail, now are learning the uses of Web-enabled collaboration tools that permit close collaboration. Such tools do not require any immediate presence of the service provider on site, or the use of the financial planner’s assets, inventory, rental space or other facilities.

Centralized Security and Storage.
Data security and storage must be managed effectively.

Added Value.
By outsourcing substantial portions of a business, the business manager risks losing the competitive advantage of controlling a niche specialty. This is a classic challenge for outsourcing customers generally. Like other risks, it requires a balancing of business, legal and commercial requirements with the perception that the business manager lacks the essential tools. So the marketing of such operations requires a continuous compelling reason for the clients to buy the services. Effective supervision and integration of outsourcing service providers adds value by providing teamwork and leverage.

Print This Post Print This Post

Filed under: White Paper
Tagged: , , ,