Kendrick Wakeman was having trouble hiring technology talent for FinMason, his growing risk tolerance turned investment analytics technology startup.
Affording top software engineers wasn't the problem. It was convincing them to come to work for a company serving financial advisers rather than a popular consumer-facing tech giant like Amazon, Google or Apple.
"The development market in this country is flat-out dysfunctional right now," Mr. Wakeman said. "Why go work for a guy at a financial services firm — which, by the way, you've always been told is evil — when you could go work somewhere fun?"
Rather than settle for B-grade talent, Mr. Wakeman expanded his search overseas. In Prague, Mr. Wakeman found a deep pool of talented engineers who spoke English and weren't angling for a position in Silicon Valley.
In June 2017, Mr. Wakeman decided to put FinMason's engineering resources in the Czech Republic permanently. He made the first key hires in August, including a Prague-based chief technology officer, and filled out the staff in October, making each developer a full-time employee with equity in the company.
Offshoring the firm's engineering resources was the scariest decision he's made as an entrepreneur, but, nearly a year later, one that paid off in spades, Mr. Wakeman said.
For example, the Prague team's work on FinMason's database reduced the time it took to store nearly 7 billion calculations each day down from four hours to just 11 minutes.
"Engineering can be a competitive advantage if you do it right, and the right move was to go overseas at this particular time," he said.
FinMason is hardly the only firm to look internationally for skilled programmers. TradePMR, an RIA custodian, outsourced its technology teams to Lithuania and Mexico. Robb Baldwin, its founder and chief executive, said the move created a 24-hour work cycle for the company, ensuring that data coming in throughout the night is always updated and accurate for advisers in the morning.
It also helps the smaller custodian remain competitive on price, as well as technology.
"When you're able to outsource some of these positions to really qualified personnel, highly educated and with eight to 10 years of experience in development and bring them on board for half [the price], it becomes kind of a no brainer," Mr. Baldwin said.
International outsourcing, of course, isn't new. While the strategy may not be popular among the consuming public, especially in an "America First" era, most financial advisers likely recognize it as a common business practice across industries.
But when it comes to wealth management technology, which often rely on sensitive personal financial information, some advisers may be concerned about the safety of their clients' data.
Rick D'Angona, chief executive of third-party credentialing and risk assessment firm 3PAS Global, said offshoring engineering increases cybersecurity risks, especially in nations known for having higher rates of fraud and corruption.
"When it comes to development, the risks are inherent in the ways the developers are creating the code, testing the code and reviewing it with security teams," Mr. D'Angona said. "There are a lot of pockets in Eastern Europe where there are hives of coders that could be putting in backdoors."
There are compliance challenges with new regulations on data protection and privacy. The European Union recently implemented the General Data Protection Regulation, and U.S. regulators are working on their own measures.
With all of the extra risk management and compliance controls, Aaron Spradlin, chief executive and co-founder of cybersecurity firm cleverDome, questions how much money an outsourced development team would really save.
Oranj CEO David Lyon said he tried offshoring his firm's development team to India, but ultimately reversed course in less than a year. It simply became too difficult to consistently manage product quality and data security, he said.
"There's typically a lot that is lost in translation in terms of subject matter expertise," Mr. Lyon said. "It's hard to know where your code is being stored or not being stored, and what kind of protocols they are taking on their end."
"With a lot of attention put on data security, a lot of larger enterprises tend to feel more comfortable with firms that keep everything onshore," he added.
While Mr. Lyon isn't "anti-offshoring," he said it was more important for Oranj's corporate culture to bring things entirely stateside. He also disputed the idea that young engineers don't want to work in financial services and said his company has drawn a lot of local talent in Chicago.
Mr. Wakeman and Mr. Baldwin said they took these issues into consideration before moving a team offshore. Their international teams don't have any access to financial information and they work on product development using anonymous data and push code back to the U.S. using virtual private networks instead of the public internet, they said.
Mr. Spradlin praised the companies as examples of technology vendors doing things the right way, but he said there still are cybersecurity risks involved.
"The reality is, things will break down from a control perspective. When all of a sudden something is breaking in the product and the chief developers are all offshore, the only way to fix it is to get production data," he said.
That would require the offshore teams to access privileged data that perhaps they shouldn't.
"It's not the best practice at all, but that's typically what happens," he said.
For advisers vetting technology vendors, it's a practice that should disqualify the vendor, Mr. Spradlin said.