Michael Kitces recently asked, on his Twitter account, when are we going to stop talking about “robos” and start calling them investment software platforms?
His point: What we’ve been calling institutional “robo” platforms are nothing more than software with interesting new features that automate things that advisors have traditionally been doing by hand. Like, for instance, combining DocuSign with LaserApp with account aggregation with an onboarding questionnaire, so that account transfer forms are automatically and accurately populated and ready to be signed online. Or like automatically rebalancing client accounts to tolerances that advisors set up themselves.
At the recent T3 conference in Anaheim, I heard people saying that the “robos” (which I will henceforth refer to as online account platforms) are nothing more than the latest version of TAMPs – turn-key asset management platforms.
But is that true? Certainly, both make it more convenient to manage investments. But there are some important distinctions. The online account platforms are fundamentally software, while TAMPs represent a delegation of the asset management duties to a third party?
Let me say, before we go further, that I’m not a great fan of the TAMP concept, which I think gained traction because independent firms realized they could create asset management platforms that were greatly superior to the hastily-constructed services that broker-dealers were providing to their reps.
To help you understand my lack of fan-dom, let me tell you the story of a salesperson I knew back in the 1990s. Throughout his career, this person had sold just about every bad product imaginable, which is another way of saying he chased the highest commissions he could find, which were invariably attached to limited partnerships that eventually blew up and annuities with 20-year surrender charges that never could have made money for their investors.
The founders of a new TAMP got hold of this superb salesperson as he was fighting off client lawsuits, and showed him a whole new revenue opportunity. Instead of getting 8% up-front to sell products, he could switch to selling their managed money services and charge… whatever he wanted! In his case, he chose to put 1.5% a year into his pocket, on the logic that if he could keep his customers invested for five years, he’d end up making about the same (let’s call it a commission) as any of the other products he was selling – and after that everything would be gravy. The TAMP, meanwhile, charged almost 2% a year for the portfolio management and reporting.
When I ran into this salesperson at an annual conference, and asked him about the lawsuits, he introduced me to this new “product,” and happily told me: “I’m now a fee-only financial planner!”
So how do we make a distinction between a TAMP – which I would characterize as a product, like an annuity or non-traded REIT – and an online account platform – which is software like the semi-automated rebalancing engines like iRebal, Trade Warrior or Total Rebalance Expert?
I’d like to hear your thoughts on the subject. Here are my preliminary ideas.
First, I would argue that the TAMP represents a delegation, which takes the advisor out of the asset management loop and effectively makes him or her an asset gatherer. A wirehouse broker who gathers assets that are put into separately-managed accounts at Merrill or UBS could switch to a broker-dealer, select a TAMP and go right on gathering assets without missing a beat.
In contrast, an online account platform like Advisor Engine (formerly Vanare), Jemstep, Betterment Institutional or Robust Wealth provides enhanced tools for the advisor who remains very much in the asset management loop. “Enhanced” simply means that the software is doing work that previously had to be done by hand, just as Trade Warrior, TRX or iRebal are automating the rebalancing chore. The advisor is still creating the portfolios and monitoring them, albeit with better tools than ever before.
More importantly, the TAMP fees represent a hidden transfer of value from customer to advisor. The customer ends up paying additional ongoing fees for portfolio management services that the advisor would otherwise have had to pay for in the form of salaries for back-office staffers. Put another way, the TAMPs provide conveniences to the advisory firm in the form of reduced overhead, and customers get essentially the same services they would have gotten from the in-house advisory staff, but pay more for it. The “more” is the fee the advisor takes for gathering the assets.
The online account platform, meanwhile, enables the advisor to deliver the asset management service to the client at a lower all-in cost. The client pays for the advisor’s services, not the technology. This criterion shifts SEI from the TAMP category over to the online account platform, since the SEI relationship generally delivers lower costs to clients in the form of lower asset management fees on the underlying portfolios and additional savings through tax-loss harvesting within the separate accounts.
SEI, unlike TAMPs like Brinker Capital or Lockwood Advisors, also allows advisors to build custom portfolios out of a large menu of investment options. Advisors stay hands-on with the portfolios.
Finally, the online account platforms are using technology to replace activities (like rebalancing, performance reporting and tax-loss harvesting) that are generally done by hand at the advisory firm or outsourced to the TAMPs. The TAMPs serve as a replacement for the advisory firm’s portfolio management staff, while the automated account platform replaces staff with better software and integration. The essential distinction is that online account platforms remove those activities from having to be done by humans altogether.
There may be other distinctions that make this picture a little fuzzier than I’ve made it here. Neither Schwab Intelligent Portfolios nor Betterment Institutional will import the client’s existing investments, and both automatically create recommended portfolios for clients, pushing advisors further out of the loop than, say, AdvisorEngine or Jemstep. Indeed, I might argue that Schwab’s internal reps are selling Intelligent Portfolios, rather than utilizing it as a tool.
But I’m very interested to know what you think. Are you currently using one of the TAMPs or the automated account platforms? If so, what would you calculate to be your all-in cost, before you add your own fees?
How much involvement do you have with the asset management services once the client accounts are set up at your TAMP or online investment platform?
What do you think is the distinction between a Robo and a TAMP?
Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com. Or check out his Insider's Forum Conference (for 2017 in Nashville) at www.insidersforum.com.
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Michael Kitces recently asked, on his Twitter account, when are we going to stop talking about “robos” and start calling them investment software platforms?
