This article is a companion piece to this podcast.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
I’ve worked at firms that offer outsourced portfolio management services – so-called turn-key-asset-management providers (TAMPs) – for almost 30 years. I know the industry very well and have seen my share of disasters. Here’s what to watch out for when selecting a TAMP.
Most articles about outsourcing investment management are written by people who sell such services. This one is no exception. But the purpose of this article is not to sell you on outsourcing or my firm’s offering.
In this article I’ll try to answer these five questions:
- How do you know if you’re a good candidate for outsourcing?
- What are the available options for outsourcing?
- What services do you get when you outsource?
- What are the benefits of outsourcing?
- What factors should you consider when choosing an outsourcing partner?
Is it for me?
Skip the remainder of this article if you are not a good candidate for outsourcing. Here’s how you find out if you are.
Start by asking yourself, “What’s my passion?” If you became an advisor because you love the technical aspects of investing, you are not a good candidate for outsourcing. Why give up an activity that brings you great joy?
Also ask yourself, “Where do my talents lie?” If you are passionate about investing, but not particularly talented at it, consider outsourcing. You are a fiduciary and should be focused on providing your clients the best possible investment outcomes.
Then ask yourself, “What are my goals?” Advisors who are passionate about investing may have overriding goals that make outsourcing a smart choice. Examples include advisors who love investing, but love doing financial planning even more. Or advisors who want to sell their practice and realize it may be harder to do so if they are the chief investment officer.
Finally, ask yourself, “Can I give up control?” When you outsource, you give up a significant amount of control over the management of client portfolios. You also give up control over other things like the design of the performance reports and the functionality of the client portal. If you will be miserable if you can’t control everything, outsourcing is not for you.
If you’re on the fence about outsourcing because you think your clients view investing as part of your personal value proposition, you might want to reconsider. A Northern Trust study showed that 92% of clients had a positive reaction to outsourced investment management services and 96% of advisors were satisfied with their decisions to outsource.
If you are open to outsourcing investment management, keep reading.
What are my choices?
There are four different outsourcing business models. I’ll call the first one the “traditional TAMP” model. This is the business model used by my firm, First Ascent Asset Management, and other firms like Loring Ward and Brinker.
In the traditional model, the TAMP offers in-house investment management services. All or most of the portfolio options are managed by the TAMP’s own investment group. Traditional TAMPs charge a fee for their services, although some have created proprietary mutual funds and derive their compensation through the expense ratios of those funds.
This model works best for advisors who find a TAMP they like and don’t care about having access to a supermarket of investment choices. Traditional TAMPs all have different processes, procedures, and work flows, so it is inefficient and unwieldy for an advisor to work directly with many different traditional TAMPs. Two or three is probably the limit.
I’ll call the second business model the “platform TAMP” model. This is the business model used by firms like Envestnet, Adhesion, and SMArtX. Platform TAMPs offer access to portfolios or investment products from many different firms. They may also offer their own portfolios or products, but the bulk of their offering is from outside firms.
Platform TAMPs are ideal for advisors who want access to a supermarket of investment management options all on a standardized platform. We live in a world of coopetition, so platform TAMPs may offer the portfolios of traditional TAMPs on their platforms. For example, First Ascent, Loring Ward, and Brinker all have portfolios available on the Envestnet platform.
Platform TAMPs usually charge two separate fees. The first is a “platform fee” that covers services such as due diligence, trading, performance reporting, and billing. The second is a fee that covers the investment management services of the managers whose portfolios or products are accessed through the platform.
The third outsourcing option is a relatively new one. It is the “model marketplace.” Model marketplaces are available through firms like TD Ameritrade, Orion and Oranj.
In a model marketplace, advisors are given access to model portfolios from multiple asset management firms, referred to as “strategists.” Marketplace sponsors don’t usually offer their own portfolios, but create virtual marketplaces of portfolios and products from other firms.
These model portfolios are often available without any strategist fee since, in many cases, they are comprised of proprietary products managed by the strategist firm. Vanguard, Blackrock, and Fidelity are examples of firms that offer this kind of marketplace models.
Model marketplaces don’t offer many of the services offered by TAMPs. They offer access to models, but they don’t take discretion of the account. The advisor is responsible for trading, performance reporting and billing – services handled by both traditional and platform TAMPs.
The advisor’s implementation of the models is usually facilitated by technology provided by the marketplace sponsor. Since advisors are responsible for model implementation, they can modify those models – an option not widely available from TAMPs.
The fourth option is to subscribe to models directly from firms that offer their own models, usually for a fixed annual fee. Advisors who subscribe are fully responsible for implementation of the models. This leaves advisors the administrative burden and fiduciary liabilities of portfolio management, but gives them the option to make desired modifications to the models.
Examples of model subscription services include InSight offered by Rowling & Associates and AdvisorIntelligence offered by Litman Gregory.
What services do I get?
The services offered through the different types of providers vary quite a bit.
Traditional and platform TAMPs offer a complete suite of services that typically include:
- Discretionary portfolio management, including trading and rebalancing;
- Account administration (account opening/closing, periodic distributions, etc.);
- Performance reporting;
- Billing services (for both TAMP and advisor fees);
- Marketing material and proposals;
- Ongoing market commentary, research, whitepapers, etc.;
- Technology tools (account onboarding, client portal, advisor portal, etc.);
- Service team support; and
- Practice management and educational programs.
The nature, quality and extent of these services vary widely from firm to firm. TAMPs compete, in part, based on the ancillary services they offer. There has been an arms race in this respect in recent years.
Model marketplaces typically offer little other than the models themselves, although the models are very often integrated into the technology offerings of the firms that provide them. This facilitates the advisor’s ability to trade, generate performance reports and perform other functions related to account management and administration.
Model subscription services typically provide models and research to support the advisor’s ability to understand the models and explain them to their clients.
What are the benefits?
The benefits of outsourcing investment management functions have been well-documented in multiple studies. But those benefits have been identified through surveys of advisors who have made the decision to outsource and, for the most part, are happy with that decision. If you are passionate about doing the investing yourself, or will be uncomfortable ceding control to a TAMP, these benefits may not be sufficient to justify outsourcing.
Here are the primary benefits:
- More time to grow your firm and/or service clients;
- More time to focus on areas of strength/interest;
- Operational efficiencies/cost savings;
- Greater consistency/credibility of investment process;
- Ability to offer a broader range of investment options;
- Institutionalization of your practice;
- Ability to sit on the same side of the table as the client;
- Better due diligence/investment results; and
- A partner that can help support your firm.
The importance of these benefits will vary among advisory firms. Depending on the outsourcing partner you choose, you may, or may not, realize all of these benefits.
What should I consider when choosing a partner?
Once you decide to outsource and select the model that is right for you, you still have a lot of work to do in identifying an outsourcing partner. TAMPs differ considerably.
Here are five factors you should consider in making your choice.
Although TAMPs are focusing more and more in their marketing on their ancillary services, the heart of their offering is still asset management. Do the same extensive due diligence you would on any other asset management offering.
Make sure their portfolios are consistent with your philosophy and approach to investment management. Look for a disciplined process that you understand and can explain to clients.
Ask about open architecture, objectivity and the use of proprietary products. Some firms adhere strictly to an objective process that values open architecture. Others offer portfolios that are transparently comprised of funds or ETFs from a single firm. Some firms, however, are less forthright about the limitations they put on their fund-selection process. Make sure you drill down and understand any financial or other relationships that influence fund selection.
An outsourced investment management provider is no better than the people behind the firm. Check out their experience, reputations and credentials. But also pay attention to the intangibles like their attitude, responsiveness and flexibility.
You are choosing a long-term partner for your firm. Both you and your clients are entrusting that partner with a huge responsibility. If the chemistry isn’t there, walk away.
Services and Service
Make sure you thoroughly understand what services are included in the TAMP’s offering. Don’t assume anything. There is great variation among TAMP offerings.
The selection of a TAMP is a fiduciary decision. Choosing a TAMP is not like choosing a CRM or financial planning software, which is paid for by your advisory firm. You are selecting a firm to manage your clients’ assets and those clients are paying for it.
Some TAMPs offer advisors services that do not directly benefit their clients as an incentive to attract those advisors to work with their firms. Such services may include tech tools, website development, compliance services, and marketing support. Be careful of this type of come-on. Don’t use client assets to pay-up for services that benefit you, but not them.
Good services and good service are not the same thing. A firm that has a great list of available services may be terrible at delivering them. Interact with the individuals who will service your firm. Get referrals from other advisors. Make sure your outsourcing partner cares as much about your clients as you do and has the ability to deliver the level of service that you expect.
The variation in TAMP fees is surprisingly wide. Pay close attention to this area. It directly affects the long-term financial security of your clients. Higher fees reduce returns. Even small differences can make a huge difference in your clients’ terminal wealth over time.
Most traditional TAMPs charge a percentage of AUM. But there are variations. Our firm charges a low, flat annual fee with a household cap. Schwab recently introduced subscription fee pricing for its Intelligent Advisory direct-to-consumer program, so expect more departures from the traditional percentage of AUM approach in the future.
Ask about any “nickel and dime” charges for extra services. Ask about the internal expense ratios of the portfolios. Find out if trading costs are included in the TAMP’s fee and, if not, how much they are likely to be. All of these are costs your client will incur.
If you are considering a platform TAMP, remember there is both a platform and a manager fee. Add the two together if you are comparing the cost of working with a traditional TAMP to the cost of working with a platform TAMP.
This is an intangible quality that is hard to pin down, but very important in deciding on an outsourcing partner. Whether consciously or not, every TAMP, model marketplace and subscription service is designed to serve a particular type of advisor.
Every firm has a target market and a culture that determine what your experience will be in working with that firm. Ask about the firm’s average account size. Ask about their minimum account size limits. Ask what types of advisory firms they serve.
Ask what gets them going every day and why they are in the business of providing outsourced portfolio management services. Make sure your firm will be welcomed and valued. Look for an outsourcing partner that shares your approach to doing business and serving clients.
Selecting an outsourced portfolio management service provider (or deciding not to outsource) is a highly personal decision. Focus on your own goals and objectives and test every option against that standard. It will take some work to sort through the outsourcing decision and find the right solution for you and your firm, but the effort is well worth it.
Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based TAMP that provides
investment management services to financial advisors and their clients. He has served as president or CEO of five TAMPs over the course of the past 30 years. He is a 40+ year veteran of the financial services industry. He can be reached at [email protected]
More ETF Topics >