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Freedom Though Independence:
Outsourcing your Investment Research

By Karla Paxton
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This is the fifth installment in our series of transitioning to an RIA.  Part 1 discussed selecting a custodian, Part 2 discussed selecting in-house software for your operations, Part 3 discussed outsourcing your operations, and Part 4 discussed going paperless.

Karla PaxtonAdvisors can now control overhead and improve performance by outsourcing the analysis and due diligence for your investment portfolios, achieving the same success as with outsourcing back office operations.  A rapidly expanding universe of hedge funds, separate accounts, and traditional funds is making it harder for advisors to review investment vehicles in-house.  The cost of having a research staff is also getting more expensive.  For the new RIA, outsourcing investment research allows you to concentrate on obtaining and servicing clients. 

The SEC requires advisors to have a well-documented process showing how your investments are chosen.  Outsourcing removes this regulatory burden.

We look at two types of firms offering investment research to RIAs.  First, turnkey asset manager programs (TAMPs) offer research bundled with back office support services (portfolio management, reporting, billing, account administration, etc).  Second, a new crop of firms coming from the institutional consulting business are branching out to provide stand-alone investment research to RIAs. 

Turnkey Asset Management Programs (TAMPs)

A TAMP typically provides an advisor with a platform offering a suite of functionality, including manager research and monitoring, fund analytics, asset allocation modeling, and back office support for trade execution, rebalancing, and administration.  The key advantages for advisors are rapid startup, no upfront costs, built-in compliance, and the ability to utilize sophisticated analytics.  These advantages do not come without a cost, and the downside can include lack of control over the investment strategy, lack of customization and limits on the range of investment vehicles that can be accommodated.

Data from Tiburon Research shows that assets managed by TAMPs grew from approximately $16 billion to $250 billion over the last ten years.  Tiburon cites the largest TAMPs as Prudential Financial, Envestnet, SEI, and FundQuest, with these four firms collectively controlling approximately half of the TAMP assets.  Other major TAMPs include AdvisorPort, Lockwood, Russel, Genworth, SunGard, and Brinker Capital.

Envestnet is typical of the larger TAMPs.  Their investment management arm, known as Portfolio Management Consultants, performs the qualitative and quantitative investment research and due diligence on separately managed accounts, mutual funds, ETFs and alternative investments.  Envestnet provides the portfolio management, including the account aggregation, reporting and billing.  Their fee for the platform and the research is 30 basis points.

Envestnet provides an open architecture environment, offering advisors a broad – and essentially limitless – choice of mutual fund and separate account managers.  A number of smaller TAMPs offer similar analytical and modeling tools, but utilize a pre-defined set of funds, usually from a single fund company or a small number of fund companies.  BAM Advisor Services and Symmetry Partners, for example, utilize Dimensional Funds (DFA).

Two firms mentioned in a previous article, Rockefeller & Co.  and Fortigent, offer services similar to TAMPs mentioned above.  Rockefeller has internal investment options and offers access to third party investment managers.  They also have a portfolio management system and other back office services.  Fortigent’s investment consulting is supported on their portfolio management and reporting system.  Fortigent also offers services specifically geared to aiding newly created RIAs with the transition process.

There are some independent RIAs who offer their own investment research to other RIAs.  An example of one of these firms is Rumsey Asset Management, located in Southern California.  They have created a strategy utilizing mutual funds and ETFs.  Firms such as this offer investment research, asset allocation modeling, and manager monitoring, but typically do not offer the degree of back office support provided by the larger TAMPs.

Stand Alone Investment Consulting

On the institutional side, endowments, foundations, and plan sponsors rely heavily on the consulting industry for manager research, performance measurement, asset allocation, and investment research.  Some of these consulting firms have opened up their practices to RIAs.  However, they often require a sizeable minimum asset commitment, and are not going to be a viable option for a newly-created advisory practice.

The Independent Consultants Group is a resource for advisors interested in pursuing this option.  Their members are affiliated with State Street and have access to tools such as universe comparison databases.   Asset Consulting Group, Inc. and Canterbury Consulting  are two member firms that provide investment consulting services, specializing in assisting institutions and high net worth clients with a variety of investment consulting needs including

  • Investment Policy Review/Creation
  • Asset Allocation Modeling
  • Fund Cost Efficiency Analysis
  • Manager Search
  • Investment Portfolio Structuring
  • Performance Measurement
  • Manager Review and Analysis

These firms have minimums of $100 million or more in assets, and tend to be used by RIAs focused on the UHNW segment and single- and multi-family offices with complex investment needs.

This type of service is new to the RIA industry.  As more independent financial advisors focus on the overall client relationship and the coordination of the estate planning, insurance planning, tax planning, and charitable planning, its use may become more widespread.

Comparing the Alternatives

The alternative to outsourcing investment research is having your staff review investment vehicles, whether they come from a search in Morningstar or because your client heard about a great investment on the golf course.  Having the staff requires hiring the people with experience and credentials.  These people, typically with a CFA degree, command high salaries.  Advisors should compare the cost of an outsourced solution to the cost of hiring an experienced CFA. 

Which firm an advisor chooses depends on the types of investments you want to present to your clients, the fees you can afford, whether a back office support system is necessary, and the level of research you need.  You must assess whether an open architecture is important.  Open architecture allows for more investment choices, but will be more expensive.  TAMPs who have their own managers or who utilize a fund company offer fewer choices, but will be more affordable to smaller firms.

Staffing and cost are not the only determining factors.  You will also benefit from a larger universe of investments and in-depth research and analysis.  TAMPs and research providers have individuals specialized in different investment vehicles, whether they are equities, fixed income, or alternatives.  It is very costly to have a staff that specialized.

Karla Paxton is an independent consultant with a practice that helps investment advisors with their transition to an independent RIA model.  She can be reached at .

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