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A turn-key asset management program (TAMP) provides many benefits, but you must choose wisely and select one that is a good fit for both you and your clients.
There are many ways to go wrong in choosing a TAMP. Here are two no one is talking about.
The first mistake: Investment management is not a commodity
A TAMP manages money for the clients of financial advisors. TAMPs provide many ancillary services, but the heart of its offering is asset management.
It is fashionable to say that asset management is a commodity. Believing that, and acting upon that belief, is a mistake you should avoid. Both you and your clients will pay dearly if you fail to heed this warning.
Investopedia defines a commodity as “a basic good used in commerce that is interchangeable with other goods of the same type…The quality of a given commodity may differ slightly, but it is essentially uniform across producers.”
If you think asset management meets that definition, you haven’t looked at the facts.
Even if you adhere to a cap-weighted index fund, the asset management services provided by TAMPs, or any asset manager for that matter, are neither “interchangeable,” nor “uniform across producers.” In fact, there are wide variations in the results produced by asset managers with purportedly similar risk/return targets.
Here’s an example. Every quarter, Backend Benchmarking produces the Robo Report, which, among other things, analyzes the performance of over 60 portfolios managed by 40 different asset management organizations. The portfolios have roughly similar investment objectives.
The fourth quarter 2020 Robo Report showed that the performance of those portfolios was anything but “interchangeable,” or “uniform”:
- For the one-year period, it varied by more than 1,000 basis points;
- For the two-year period, it varied by more than 600 basis points;
- For the three-year period, it varied by more than 400 basis points;
- For the four-year period, it varied by more than 260 basis points; and
- For the five-year period it varied by almost 200 basis points.
Dispersion of this magnitude over an investing lifetime will cost a client hundreds of thousands of dollars, if not more, depending upon the size of the account.
You will find similar dispersion among managers with purportedly similar investment mandates in any database you examine. Of course, there are differences in the way each manager interprets and implements their mandate. But that’s the point.
Different asset managers, even those with similar investment objectives, produce widely varying outcomes for their clients. The fees they charge may be falling to the point where they are priced like commodities, but the results they produce are far from commodity-like.
Many TAMPs prefer to compete based on their “cool” technology, size, number of years in business, or the ancillary services they provide. It’s hard to tell with some of them who actually manages the money and what their qualifications are for doing so.
Don’t be distracted from doing your important work as the gatekeeper to your clients’ assets. Hold TAMPS accountable for their performance. Make sure they pass the due-diligence screens you would when you select mutual funds or ETFs for your clients’ portfolios.
There are material differences in TAMP investment offerings and you can add significant value to your client relationships by paying attention to them. Raw performance is not the only factor you should consider, but it is certainly important to a client’s financial well-being.
The second mistake; Neglecting your fiduciary duties
Selecting a TAMP for your clients is an investment decision. If you are a registered investment advisor, that decision is subject to your fiduciary responsibilities under the Investment Advisers Act of 1940. If you are a broker, it is subject to the requirements of Regulation Best Interest.
That means in selecting a TAMP you must act in the best interests of your client. This is another reason you must conduct due diligence to determine the quality of the TAMP’s investment services and the reasonableness of its fees. The law requires it.
You don’t have to bounce back and forth every quarter between the top-performing or least-expensive TAMPs. But don’t stick with a perennial cellar-dweller because you like its technology. Keeping client assets invested at a high-priced TAMP that consistently produces mediocre results because you like the marketing support they provide won’t cut it.
It is not acceptable to choose a TAMP based solely on benefits that your firm receives from the TAMP. TAMPs can make your firm more efficient, help you grow your business, and support you in many ways, but these are benefits to you and your firm. They are not services that directly benefit your clients. Focus first on the benefits to your clients and their best interests.
It is also unacceptable to stay with a TAMP simply because you have used them for years. Would you hold a fund in a client’s portfolio simply because it made sense years ago? It may take some effort to do the research or switch to a new TAMP if you find a better alternative, but that is what your clients are paying for and what the law demands.
The extra work will pay off. You will demonstrate your value to your clients and, if the change results in better performance, both you and your clients will benefit.
Don’t make the mistake of thinking that hiring a TAMP is in the same category as selecting financial planning software or choosing a marketing consultant. In making those decisions, you can focus on what’s best for you and your firm. Hiring a TAMP is an investment decision subject to regulatory requirements that have serious consequences if violated.
A final word
A TAMP provides great benefits to you and your clients. But in choosing a TAMP you must keep the best interests of your clients squarely in focus.
To learn more about whether you are a good candidate to outsource your investment management to a TAMP and how to select one that’s a good fit for your firm, start here: What to Watch Out for When Outsourcing Investment Management or The Podcast—What to Watch Out for When Outsourcing Investment Management.
Scott MacKillop is CEO of First Ascent Asset Management, the first TAMP to provide investment management services to financial advisors and their clients on a flat-fee basis. He is an ambassador for the Institute for the Fiduciary Standard and a 45-year veteran of the financial services industry. He can be reached at [email protected]
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