WHITEPAPER

Should You Outsource Your Investment Management?

 

3 Questions for Investment Advisory Firms Considering a TAMP

By Scott MacKillop

Strategic Advisor, GeoWealth

Understanding the benefits and the tradeoffs of outsourced investment management will help you make the decision that is right for you and your practice.

Industry Embrace of Outsourcing

TRENDS & BENEFITS

Outsourcing of the investment management function by financial advisors has grown dramatically since its beginnings in the late 1980s. Turnkey asset management providers (TAMPs)—platforms that offer outsourced portfolio management services to advisors—managed approximately $843 billion for financial advisors by 2024, up from $160 billion in 2010, according to Tiburon Strategic Advisors.¹ Technology TAMP platforms, which provide portfolio accounting and performance reporting services to financial advisors, administer approximately $25.2 trillion, up from $2.1 trillion in 2010.¹

Clients also enjoy the benefits of outsourcing. A 2014 study by Northern Trust showed that clients have had an overwhelmingly positive response (92%) to outsourced investment management. This high level of acceptance has contributed to the continued growth and interest among advisors in outsourcing.

Some advisors express reluctance to outsource based on their perception that clients want them to be directly responsible for portfolio management. However, a 2018 TD Ameritrade study on outsourcing found that 57% of clients express no preference regarding the advisor’s level of involvement.

Regulatory pressures have also contributed to the trend toward outsourcing. New regulations expanding fiduciary responsibilities to a broader set of advisors are causing an increased interest in outsourcing as advisors seek ways to delegate investment management responsibilities to specialists. Broker-dealers are also encouraging advisors to outsource to reduce potential investment-related liability.

Encouraging outsourcing is now a standard part of practice management seminars for advisors. It is positioned as a way to give advisors more time to attract and service clients while, at the same time, placing advisors and clients “on the same side of the table.”

1 Proprietary information provided by Tiburon Strategic Advisors to GeoWealth. GeoWealth can provide further detail upon request.

BY THE NUMBERS:

A study conducted in 2021 by 8 Acre Perspective for AssetMark found that 99% of advisors who outsource experience at least one significant benefit. According to the study, advisors are:

  • Happy with their decision to outsource 92% 92%
  • Experiencing accelerated growth in assets as a result of outsourcing 91% 91%
  • Delivering better investment solutions as a result of outsourcing 98% 98%
  • Experiencing better work/life balance as a result of outsourcing 95% 95%
The Growth of Outsourcing

A HIGHLY PERSONAL DECISION

Despite its potential benefits, outsourcing is not for everyone. Studies vary, but a recent report from Cerulli indicated that a total of 34% of advisors are using models in some capacity. Matt Apkarian, associate director of product development at Cerulli and an author of that report says ‘most advisors are not using 100% models and almost all advisors are using at least some models.’ That means many financial advisors continue to manage client assets themselves.

That is because the advantages of outsourcing, come with trade-offs. Understanding the benefits and trade-offs will help you make the decision that is right for you and your practice. By asking yourself three questions and considering the list of benefits and trade-offs below, you can quickly determine if you are a good candidate for outsourcing. Remember, the decision is a highly personal one that should be based on the facts and circumstances surrounding your business, not general industry trends.

WHY FIRMS OUTSOURCE:

R

Leveraging professional qualifications and fresh ideas from outside your firm

R

Relief from the burdens of account administration

R

Less time on due diligence means more time to focus on acquiring and servicing clients

R

The ability to “institutionalize” the investment management function

R

Potential cost reductions for the firm and/or their clients

Your 3 Questions

By asking yourself 3 questions, you can quickly determine if your firm is a good candidate for outsourcing investment management processes:

QUESTION

What is your passion?

Remember why you became investment advisor in the first place.

The first question to ask yourself is “why did I become a financial advisor?” Advisors usually fall into one of two camps. Either they love the technical aspects of the business or they love working with people.

If you’re a “techie” whose passion is investing, you are probably not a good candidate for outsourcing. Why deprive yourself of the activity that brings you joy? However, if your technical passion is financial planning, outsourcing could allow you to concentrate on an area that truly delights you.

If you’re a “people person,” consider outsourcing. You could effectively buy back a significant number of hours each week and spend them interacting with clients and potential clients. This could energize you and enhance the quality of your workday.

QUESTION

Where do your talents lie?

Even if your team is passionate, there may be skill gaps.

The second question is “what am I good at?” Even if you are passionate about investing, if you are not skilled at it, consider outsourcing. Your clients shouldn’t suffer simply because you enjoy investing. You have a fiduciary duty to do what is their best interests. Be honest in your self-assessment.

If you are good at investing, but don’t care for it, pause before deciding to outsource. Your clients shouldn’t suffer simply so you can offload a task that you don’t care to do. Before deciding to outsource make certain your outsourcing partner can serve your clients as well as you have.

QUESTION

What are your goals?

Evaluate the long and short-term goals for your firm.

Your decision should be based on your goals. If you’re happy with your firm and your work life, don’t outsource. The decision to outsource will change the nature of your practice and can be temporarily disruptive. These changes and disruptions can result in long-term benefits, but they should not be taken lightly. Outsource only if you are doing so to accomplish specific goals that you can clearly articulate.

Outsourcing can help you achieve a wide variety of possible goals, many of which are listed below. But you may have other specific goals that outsourcing can help with. Make sure you can articulate what you are trying to accomplish before you decide to outsource and that you have considered the tradeoff factors discussed below.

Considering the Benefits of Outsourcing:

If you think outsourcing may be for you, here is a high-level look at some of the potential benefits:

Time

Firms that outsource have more time to prospect for and service clients, which boosts client retention.

Focus

Concentrate on strengths and dispense with investment activities where no special value is added.

Alignment

Minimize potential conflicts of interest. Make it so that your client fires the investment manager, not your RIA firm.

Efficiency

Firms that outsource don’t need back-office systems and don’t expend their valuable resources on them.

Institutionalization

Firms that outsource have more time to prospect for and service clients, which boosts client retention.

WHY MAKE THE CHANGE?

Diving Deeper into the Benefits of Outsourced Investment Management
More Time to Grow Your Firm

Firms that outsource have more time to prospect for and service clients. This client-centric focus fosters client acquisition and client retention. Advisors who spend their time researching and implementing investment ideas don’t have as much time to find and service clients.

Not surprisingly, studies have shown that financial advisors who outsource tend to have larger, more profitable firms than those that do not outsource. It is certainly possible to build a thriving practice without outsourcing, but advisors who carve out more time to personally focus on growth and client service may see greater results than those who spend more time on technical investment issues.

The Ability to Concentrate on Areas of Strength

Some advisory firms use outsourcing as a way of concentrating on their strengths and dispensing with investment activities where they add no special value. For example, some firms have strength in areas such as alternative investments or private equity, but have no special expertise in managing broadly diversified core portfolios. Others may want to focus on managing their larger, more complex accounts to make sure they address their special needs. Such firms can selectively outsource investment management responsibilities to complement their areas of special focus or expertise.

Still other firms may want to focus more of their resources on services that have a greater perceived value than asset management. Services such as financial, tax, and estate planning and behavioral coaching offer firms the opportunity to address the individualized needs of their clients and provide more customized, high-value services. Outsourcing allows advisors to focus resources on these areas.

The Ability to Sit on the Same Side of the Table with the Client

Some financial advisory practices have concerns about the potential conflict of interest that exists when the firm creates a financial plan and then also implements the investment portion of that plan. The crux of the issue is that if the firm does a poor job of investing for the client, it is very hard for the advisor to “fire themselves” or provide an objective critique of their own investment performance.

Outsourcing can solve this problem. By outsourcing, an advisory firm can maintain an objective posture in analyzing and critiquing client investment performance. If the performance is not adequate (in whatever manner that may be measured), the advisor is free to terminate the outsourced asset management relationship, while minimizing the impact on their own business.

Operational Efficiencies

Maintaining a back office to support investment management activity can be expensive and time consuming. Firms that manage assets internally typically maintain portfolio accounting systems, performance reporting systems, billing systems, trading systems and other systems associated with asset management. Then, of course, these systems must be maintained and operated by skilled staff.

Maintaining and operating a back office takes focus away from other areas where you can truly add value. Managing the staff, dealing with system upgrades and failures and handling the other headaches that come along with running a back office take valuable time out of each day. Firms that outsource don’t need back-office systems and don’t expend their valuable resources on them.

Institutionalize a Practice

Many advisory firms are dealing with succession planning issues. Others are dealing with the question of how to institutionalize their practice so it might be sold someday, allowing the advisor to realize the value of the firm they have worked so long and hard to build.

In both cases, it can be difficult to transfer a practice to a new owner if the advisor who built the practice is the Chief Investment Officer. By outsourcing, an advisor can, in effect, rent an investment department that can remain in place after the departure of the firm’s founders. This enhances the transferability of the firm and provides continuity.

You’ll want to earnestly evaluate where your team’s talents lie, which areas you may be under-resourced, and how a third-party can fill those gaps.

LOOKING AT THE OTHER SIDE OF THE COIN

But There Are Also Trade-Offs to Outsourcing:

While there are costs to consider, studies have shown that short-term costs are often offset by the ability to scale more quickly and service more clients over the long-term. Let’s take a look at the potential drawbacks to the outsourcing of investment management:

Cost

Outsourcing is not free and prices vary greatly among providers. In assessing the costs of outsourcing consider the manager’s fee, the internal expenses of the portfolios, transaction costs, and any other fees or expenses that may be charged for ancillary services. Ask questions to avoid surprises.

Once you understand the total cost of doing business with the provider, net any savings you achieve at your firm through outsourcing, against the actual costs of outsourcing. Only then will you understand the true net benefit to you and your clients from outsourcing.

Service

The quality of the ongoing service you receive will determine how satisfied you are with your outsourcing decision. Understand the service model and ask the outsourcer to walk you through basic procedures like account opening and proposal generation.

Get your staff involved so they can flag potential issues. And ask for referrals to other advisors who can share their experiences. You should also check online reviews and ratings.

 

~
Control

When you outsource, you lose some control over the management of your clients’ portfolios. You can customize portfolios and respond to your client’s one-off requests. There can be limits on how much customization can be done by outsourcers. They often have minimum account sizes, householding rules, and limits on the services they provide.

Make sure you find an outsourcer that operates consistent with your needs. There are a breadth of options, so take time doing due diligence.

Portfolios

Outsourcers come in all shapes in sizes. Make sure their portfolios are consistent with your investment philosophy and that they offer a full range of portfolios to meet all your client’s needs. If they don’t, you must use multiple outsourcing firms or continue to manage certain portfolios yourself.

Understand their investment process and how they achieved their performance. Discern between actual performance and any back-tested or hypothetical performance, and avoid doing business with firms that attempt to blur that distinction.

w
People

An outsourcing firm is no better than its people. View outsourcing as you would any important long-term relationship. Make sure the people are competent, but also make sure that you like them and enjoy working with them. Look for people who have a positive, can-do attitude and seem to genuinely care about your firm and your clients. Of course experience and credentials are also key.

i
Fit

It is important to make sure you are a good fit to work with any outsourcer you select. Learn about their target market, their average account size, and their per-advisor AUM targets. Be sure they will value the relationship long-term and not view you as a tag-along.

Should You Make a Change?

Today there are hundreds of firms offering outsourced investment management services to
financial advisors—it is a crowded, but fragmented market.

The decision about whether outsourcing is right for your firm should be based on the needs, goals, and preferences of your firm and the clients that you serve. Again, outsourcing is not for everyone. But with some soul-searching and a little detective work you can determine if it’s right for you and identify a partner that fits your needs, style, and philosophy.

Our team is here to help yours evaluate changes to your investment management process or tech stack. To get started, schedule a consultative introductory call with our team:

GeoWealth is Here to Support Your Firm. We deliver:

R

Advisor Technology

Our integrated, purpose-built technology platform provides a holistic solution for RIAs seeking scale.

R

Portfolio Solutions

Leverage our Investment Team and access our proprietary models, use our model marketplace, or manage your home office models.

R

Services & Support

Eliminate time-consuming tasks and outsource your reporting, billing, trading and more for additional efficiencies as you scale.

Find The Right solution for you. Get Powered by GeoWealth.

Are you ready to get started?
Request A Demo Today!