As the trend towards financial planning as the primary value proposition for financial advisors continues to gain momentum, one of the biggest challenges that emerges is freeing up the time to provide that financial planning advice to an ever-growing number of clients. As all growing advisory firms eventually get to a point where there just isn’t simply enough time in the day to devote to nurturing client relationships (and developing new ones) and do all the other stuff necessary to make the business actually happen! Accordingly, one of the most cost- and time-efficient ways to increase the time an advisor can spend better servicing clients is by outsourcing the process of implementing (and managing) investment planning recommendations to a TAMP, or turnkey asset management platform. Yet for those advisors who do decide to outsource their investment management, the question then becomes, with the dizzying array of TAMPs on the marketplace, how do you determine which one is best (or at least, best suited to the individual advisor’s needs)?
Accordingly, in this week’s #OfficeHours with @MichaelKitces, my weekly broadcast via Periscope, we examine six areas of due diligence questions to consider when choosing a TAMP, how to understand the real costs of TAMPs, and the various ways advisors can position the cost of paying for a TAMP’s services (alongside the advisor’s own advisory fee).
Of course, as an outsourced investment management platform, one of the first (and most important) questions to ask any TAMP provider is about how they approach investments in the first place. Because all investment management firms have some sort of philosophical preference…. and without getting into the merits of one strategy over another, the reality is that whatever approach a TAMP uses is going to become your approach if you use that TAMP. Which means, ultimately, you as the advisor are going to be the one responsible for not only selling that investment philosophy (and process) to your clients, but also defending that approach when the inevitable bear market or stint of underperformance occurs. So be certain the TAMP’s philosophy is one you’re ready and willing to defend… and that the TAMP has a process to execute that philosophy, and a performance track record to validate they can deliver!
From a more nuts-and-bolts perspective, other key points to consider when evaluating a TAMP include: make sure that the TAMP is approved on your platform (if you’re under a broker-dealer), or that the TAMP can work with your custodian (if you’re with an RIA); what sort of additional technology do the various TAMPs offer (because there is a wide variety amongst providers, with some offering their own proprietary solutions, others not offering any, while still other TAMPs bolt on other third-party platforms); and what amount of additional staff support does the TAMP offer (or not), including administrative services, investment research, and marketing support.
And don’t forget that you need to determine how much the TAMP actually costs. As with anything, you get what you pay for, and at least in the TAMP marketplace, the pricing usually coincides with the level of service and support that’s provided. But, some TAMPs do price higher than others, and you need to factor in the expense ratios of the investment products they use as well, which get stacked on top of the TAMP’s base fee and can materially impact the all-in cost to your client!
Finally, bear in mind that if you plan to use a TAMP, you have to figure out how you’re going to pay for the TAMP. Some advisors simply treat the TAMPs fees as an additional cost to the client over and above their own management fee (just as the client would have paid a mutual fund manager’s expense ratio above-and-beyond the advisor’s own fee), while other advisors treat the TAMP’s fee as a business expense (because they would have otherwise had to hire and pay staff to see to those duties) and pay it from their own advisory fee, while other advisors “share” the fee with their clients, tacking on only a portion of what they’re paying the TAMP and absorbing the rest of the fee themselves (in lieu of the other staff they would have had to hire anyway).
Ultimately, the key point is that it’s important to spend time taking a deep look at each TAMP provider to make sure that you’re both a good fit for each other, both from a pure philosophical investment viewpoint, and with respect to the technology and other support services the TAMP does or does not offer (which you may or may not need!), and make sure that their offerings address the needs of your clients and how you want to run your business. No one TAMP is the best solution for every advisor, and it’s worth your time to do the due diligence to find the right one for your current and future needs in serving your clients.