Protecting client data while outsourcing noncore tasks

Blog, IT Tips, Security
5 mins read

Outsourcing has become a lifeline for many registered investment advisors (RIAs) and financial advisors. By handing off noncore tasks such as portfolio management, compliance, or marketing to specialized vendors, advisors can focus on serving their clients. However, this convenience comes with certain risks. Entrusting sensitive client data to third-party vendors introduces the potential for security breaches, data leaks, and regulatory consequences.

Let’s explore how third-party vendors can be a weak point in your security and some actionable tips for protecting your client data while outsourcing.

Why third-party vendors pose a security challenge

When you hire a vendor, you’re extending your practice’s security to include theirs. A single breach or slip in the vendor’s security measures can have a direct impact on your client data. This chain of trust, while necessary for outsourcing, poses vulnerabilities if not carefully managed.

The risks with third-party vendors often originate from several sources, including:

Lack of robust security protocols – Some vendors may not use proper encryption, lack regular system updates, or have unpatched system vulnerabilities.
Different compliance standards – Vendors that operate across industries or regions might not align with the stringent compliance standards expected of RIAs and financial advisors.
Insider threats – Employees within a vendor’s organization could accidentally or intentionally misuse access to your data.

When a vendor’s mistake impacts client data, it’s not just an internal issue for them. For you, the fallout can include:

Reputational damage – Clients trust you with their sensitive personal and financial data. Breaking that trust can harm your credibility.
Regulatory scrutiny – RIAs must adhere to regulations such as the SEC’s Regulation S-P. A violation can result in audits or hefty fines.
Legal liability – Clients affected by a breach may pursue legal action, which can be costly both in terms of money and time.
Operational disruption – A breach often requires immediate, resource-intensive efforts to contain the situation, investigate, and repair damages.

How to fortify your defenses against vendor risks

Fortunately, your RIA or financial advisory firm can take proactive steps to ensure your vendors are securely handling your data.

Conduct vendor security assessments

A vendor security assessment is a critical first step in evaluating if potential vendors meet your security standards. Some key areas to evaluate include:

Data encryption – All sensitive data that vendors handle must be encrypted at rest (stored) and in transit (being transferred). This prevents unauthorized access even if data is intercepted.
Access controls and authentication – Vendors should implement strong authentication (e.g., multifactor authentication) and have clear controls over who accesses data.
Incident response plans – Confirm that vendors have plans in place for detecting, responding to, and mitigating security breaches.
Security awareness training – Ask about employee training programs so you know if all personnel are educated on security best practices.
Compliance certifications – Look for certifications such as SOC 2, ISO 27001, or GDPR compliance that validate the vendors’ commitment to security.

Keep in mind to perform assessments regularly, not just during onboarding. Ongoing monitoring and evaluation of vendors’ security practices is crucial for continued protection of data.

Implement secure data sharing practices

Sharing data with vendors is often unavoidable, but the methods you use can either mitigate or magnify risk. A few risky practices to avoid are:

Sending sensitive information via email or unencrypted file sharing platforms
Sharing unnecessary details that increase exposure
Allowing vendors to store data on their own insecure servers

To mitigate these risks, consider implementing secure data sharing measures such as:

Secure client portals – Some vendors offer client portals with robust authentication and encryption. Take advantage of these tools to transfer data securely.
Data loss prevention (DLP) tools – DLP tools monitor and control how data is shared, preventing unauthorized transfers or accidental exposure.
Principle of least privilege – Grant data access only to those who need it. Restrict unnecessary access to confidential information.

The best practice is to minimize exposure wherever possible. Share only essential information, and consider anonymizing data if the vendor doesn’t require specific client details.

Use nondisclosure agreements (NDAs)

NDAs legally bind vendors to safeguard the information you share with them. They outline expectations and responsibilities so that both parties are on the same page. Some key elements to look for in an NDA include:

Clear definition of confidential information – The agreement must explicitly state what is considered confidential.
Restricted use and disclosure – Vendors should only use shared data for agreed-upon purposes and avoid sharing it further.
Data security obligations – NDAs should specify the measures vendors must take to protect data, such as encryption or secure storage.
Data return or destruction procedures – Require vendors to securely return or delete your information once the contract ends.

An NDA also provides legal recourse if a breach occurs, adding another layer of protection for your business.

Safeguarding client trust is nonnegotiable

Outsourcing noncore tasks allows your RIA and financial advisory firm to focus on providing exceptional client service. However, this outsourcing must be done responsibly to protect sensitive data and preserve client trust.

By conducting thorough vendor security assessments, using robust NDAs, and prioritizing secure data sharing methods, your firm can mitigate risks and create a secure, trustworthy environment for both your clients and your business.

Need help navigating IT security challenges? Reach out to our experts at RIA WorkSpace. We specialize in secure IT solutions for RIAs and financial advisors.