Illustration By Robert Nuebecker
Wouldn't you love to get rid of the headaches of managing back-office functions like portfolio accounting, billing, and trading? Wouldn't it be nice if someone else had to grind out your clients' performance reports and draft your proposals for new prospects? How about performing due diligence on thousands of mutual funds and separate account managers? Wouldn't it be great to outsource that? If your answer is "yes" to any of these questions, you may be ready to sign up with a turnkey asset management provider (TAMP).
Schwab Institutional coined this term several years ago to describe firms that offer advisors a package of services that typically include some combination of client profiling, asset allocation recommendations, fund manager or mutual fund selection, performance reporting, back-office support and marketing assistance. The combination of services offered by TAMPs is often referred to as a "wrap fee" or "managed account" program. Some TAMPs offer mutual fund managed account programs, while others offer separate account programs or both.
As Americans' investment portfolios have swelled, advisors have found a growing number of TAMPs to choose from. Among large and well-established TAMPs are Lockwood, Portfolio Management Consultants (PMC), and SEI (table, page 70). But the Web is host to a expanding crowd of TAMPs that provide services only through the Internet. They include Advisorport.com, EnvestNet.com, and NetAssetManagement.com. Most work exclusively through financial advisors, but some, including PrivateAccounts.com and WrapManager.com, serve investors directly.
In theory, working with a TAMP can free you to focus on building strong, lasting client relationships. But what are the tradeoffs? How can you tell if working with a TAMP makes sense for your practice and which TAMP to work with?
The tradeoffs come in three key areas: cost, control, and quality. Of these, the cost issue is the most straightforward. TAMPs typically charge an asset-based fee for their services. To decide whether the TAMP's fee is worth paying, you should first take a look at the hard cost savings you would achieve. These may include the cost of systems, supplies, staff, and office space you won't need because of the activities you will outsource. Then look at the opportunity cost of being a do-it-yourselfer. Could you put your time to better use by outsourcing? Finally, consider whether a TAMP can do your work more efficiently than you could on your own. The issue is not whether you can replicate a TAMP's infrastructure and perform all its services yourself. You could, of course, given unlimited time and money. But will you improve your client relationships by outsourcing?
|A User's Guide to TAMPs|
Assante (www.assante.com): Emphasizes strategic asset allocation index fund portfolios; has added "life management" offering including insurance, personal CFO
Asset Mark (www.assetmark.com): Offers mutual fund tactical asset allocation strategies; has added separate accounts, is about to launch eWealthManager online
BAM Advisor Services (www.bamservices.com): Emphasizes strategic asset allocation index fund portfolios; preparing to launch broader product offering; works primarily with accounting firms
Brinker Capital (www.brinkercapital.com): Provides separately managed accounts and related back office and performance reporting services, primarily to insurance-oriented advisors
Frank Russell (www.russell.com): Advisory arm of pension consulting firm; emphasizes actively managed, proprietary mutual fund portfolios
Greenrock Research (www.greenrockresearch.com): Focuses on research and evaluation of separate account managers; provides related back office and performance reporting services to financial advisors
Investment Consulting Group (www.galleryworks.com): Gives advisors access to traditional and non-traditional separate account managers and related back office and reporting services
Lockwood Financial (www.lkwdfncl.com): Focuses on separate accounts; offers mutual fund and exchange traded fund portfolios and back office and reporting services
Portfolio Management Consultants (www.pmcdenver.com): Offers separately managed accounts, mutual fund portfolios and performance reporting services to financial advisors and institutions
SEI (www.seic.com/iag): World's largest provider of mutual fund managed account services uses actively managed proprietary mutual funds; limited, but growing separate account capabilitiesWEB-BASED PROVIDERS
Advisorport.com (www.advisorport.com): Comprehensive separately managed account services for financial advisors, including back office and reporting services
EnvestNet.com (www.envestnet.com): Offers separately managed account services for advisors; Web site design services; network of tax and estate planning professionals
MyMoneyPro (www.mymoneypro.com): Provides separately managed account services directly to investors or via financial advisors; assets held in custody at Fidelity
Net Asset Management.com (www.netassetmanagement.com): Web-based separately managed account services; asset allocation tools and financial, estate, and tax planning tools for financial advisors
PrivateAccounts.com (www.privateaccounts.com): Provides investors with research and tools necessary to select and hire separate account managers offered through the program
Runmoney.com (www.runmoney.com): Emphasizes separately managed account services directly to investors using the Lockwood platform; also services financial advisors
WrapManager.com (www.wrapmanager.com): Online separately managed accounts and related back office and performance reporting services for investors.
The control issue is perhaps the most subjective, and, therefore, the hardest to analyze. But it is crucial that you deal with it before deciding to use a TAMP. You must ask yourself: "Am I comfortable giving up control over the functions for which the TAMP will be responsible?" For some advisors the answer is clearly "no." They simply can't allow outsiders to manage critical aspects of their client relationships. As one advisor I know put it: "If someone is going to pull the trigger on important decisions that might affect relationships I have worked years to build, it's going to be me." Does this sound like you? If so, you probably aren't a good candidate to work with a TAMP.
The good news for control freaks, however, is that there is an increasing number of alternatives that let them outsource some activities while keeping others. In the past, TAMPs tended to provide their services on an all-or-nothing basis. But some will now work with you to customize a service package tailored to your needs. This group includes PMC, a traditional provider, and Advisorport.com, which operates via the Web. Some providers also offer only a portion of the traditional TAMP offering, making it easier to pick and choose the services you want.
For example, you can gain access to separate account managers without any consulting assistance, due diligence, or performance reporting through Schwab's Managed Account Connection (www.schwabinstitutional.com). You can get access to online separate account manager due diligence consulting services on a standalone basis through Prima Capital (www.primacapital.com). You can arrange for Web-based portfolio accounting and performance reporting through TechFi's Advisor Mart (www.techfi.com). This type of ? la carte offering is becoming more commonplace and will give advisors the flexibility to determine which traditional TAMP services to outsource and which to keep in-house.
Let's say you've decided that you are willing to give up a little control in order to be competitive going forward, and you believe the cost of working with a TAMP may be a good investment for you and your clients. Now it's time to address the quality issue. Should you stick with the traditional, full-service TAMPs? Should you give one of the new online TAMPs a try? How do you choose? Let's examine how you might go about doing due diligence on a TAMP.
The first issue you will want to explore is the types of products a TAMP offers. Some TAMPs are primarily separate account oriented (Lockwood; Brinker Capital), while others are primarily mutual fund oriented (SEI; Assante). Some, like PMC, are more product-neutral and focus equally on both types of programs. In fact, the trend, particularly among larger players, is to offer a broader range of products. This accounts for recent moves by both SEI and Asset Mark to expand beyond mutual funds to include separate accounts. Be warned, however, that some firms that say they offer separate accounts and mutual funds, but do not devote equal resources to both programs.
TAMPs that focus on one product or another have made a business decision to specialize in one area. Those that offer a wider range of solutions have made a decision to service a broader audience. The important thing is that you dig deep enough to make sure the TAMP you are considering offers the type of product you need and has devoted sufficient resources to support that product.
In reviewing a TAMP's product offering on the separate account side, you should get a list of managers it offers and look at it from a number of angles. First, is there adequate asset class coverage to suit your needs? Ask if the firm is planning on adding new asset classes or will be offering hedge funds, private equity, or other alternative investments if you think your clients might have an interest. In addition, be sure there are a variety of managers to choose from in each asset class. You will want choices in case a manager you are using encounters problems and a change becomes necessary. Also examine the manager list to make sure it covers any special needs you have like tax-efficient investing or concentrated portfolios. Determine whether any of the managers will accept securities your client already holds as part of the portfolio they manage for your client. This can really help clients who have large positions in low basis stock at tax time. And find out if managers pay to play. Do they have to provide some form of consideration to be included on the manager or "recommended" lists? Ask whether the TAMP will add new managers you want, and under what conditions? Many TAMPs will add good managers to accommodate an important client relationship.
On the mutual fund side, determine how the portfolios are managed and how mutual funds are selected. Are the portfolios managed on the basis of strategic or tactical asset allocation? How often are portfolios rebalanced? Are funds selected from a large universe or is the universe limited to certain fund families or in some other way? Do funds pay to be included in the universe? Can portfolios be built to suit special needs or preferences of the advisor?
You should also place major emphasis on understanding the range and quality of investment consulting services offered by the TAMP. Find out whether the TAMP's consulting staff will help you determine a client's risk profile, prepare proposals and discuss the strengths and weaknesses of the managers offered. How much training do they provide? Will they discuss tax management of your client accounts? Under what circumstances will they help you make client presentations? A TAMP that offers a wide range of excellent managers may not be right for you if it doesn't also help you decide which managers to use or help you present those managers to your clients.
|Questions and nswers|
What A TAMP CAN DO...
Ask about the depth and experience of the TAMP's consulting staff and investment department. Be demanding. Ask for an organizational chart and a brief bio on each employee so you can see the credentials and level of experience each one has. Also, ask for the details of the TAMP's due diligence process. This is very important. The TAMP should be able to articulate, in writing, both the quantitative and qualitative processes it uses to screen managers. If it can't, keep looking.
Performance reports are the primary tangible that a TAMP produces for you and your clients. Ask to see sample reports. Find out how flexible the TAMP's reporting capabilities are. Are there different levels of reports for different types of clients? How much customization can be done? Are private label reports available? Can the TAMP do consolidated reporting so your clients can see their entire portfolio in one report?
The timing and accuracy of performance reports can have a significant impact on your client, particularly if things go wrong. Nothing undermines your credibility like errors in a performance report. Find out when and how reports are delivered. How long after the end of a quarter does it take to provide the reports? Are they available online? Is performance only calculated quarterly or is it available more frequently? The Internet has raised the bar in terms of client expectations in this area. Many clients are interested in seeing the impact of market movements on their portfolio immediately, or nearly so. Make sure you understand the TAMP's capabilities so you can set client expectations appropriately.
Technology is an area that bears close scrutiny. If the purpose of using a TAMP is to leverage your time and resources and make you more efficient, then understanding the TAMP's technology infrastructure is crucial. Find out as much as you can about the TAMP's technology capabilities and its attitude toward technology. To provide you with maximum competitive advantage you should align yourself with a firm that understands the importance of technology and is actively involved in development of service enhancements on an ongoing basis. Many of the competitors you will face in the future are spending millions of dollars on technology. If your chosen allies are not doing the same, it could spell trouble for you in the future.
Tech questions to ask include:
* What capabilities are available online today? Do they include account look-ups, account opening, performance report delivery, and manager due diligence?
* How deep and how experienced is the technology staff? Can they deliver strong tech support?
* Does the TAMP have a disaster recovery plan in place, and what is it?
* What new technology innovations are underway? When will they be available?
TAMPs today are all over the map in terms of their technology capabilities. At the one extreme are Advisorport.com, Envestnet.com, and other online TAMPs. Their technology capabilities are high, and they are designed to take full advantage of the speed and efficiency of the Internet. They provide user-friendly account look-up capabilities, Web-based research and performance reports delivered directly to your office. But if you currently work with a traditional bricks-and-mortar TAMP, you will want to be sure that it has have developed technological capabilities that are consistent with your needs and the expectations of your clients. Some, like Lockwood, have moved quickly in this area, while others, like PMC and Brinker, are playing catch-up. Asset Mark, another traditional TAMP, is about to launch an online service of its own called eWealthManager, further blurring the distinction between traditional and online TAMPs. It won't be long before every TAMP will have a high-tech look, but for now the technology playing field is not a level one. Ask to see demonstrations of each TAMP's technology and don't be satisfied with vague promises about the future.
In exploring a high-tech TAMP's capabilities, make sure it has adequate customer service and help-desk staff to deal with technical and administrative issues that inevitably come up. Also make sure you have access to knowledgeable investment personnel who can help you design the right investment solutions for your clients. Building portfolios, particularly with separate accounts, is as much an art as a science.
Of course, there is the question of price. To compare pricing among TAMPs you need to account for the TAMP's fee, the separate account or mutual fund manager's fee, custody costs, and transaction costs.
TAMP pricing is quoted either on an all-inclusive basis that covers all costs associated with the program, or on an unbundled basis, in which the cost of each component service is set forth separately. Arguments about whether bundled or unbundled fees are better relate more to cosmetics than to value. And remember that right now, at least, online TAMPs do not appear to offer a significant cost advantage over traditional TAMPs. In fact, some online providers' costs may be higher.
Be careful in comparing the cost of working with different TAMPs. I have seen some fairly misleading comparisons made intentionally in TAMP marketing presentations and, unintentionally, by the press. TAMPs may use fixed-income manager fees in quoting their own pricing, while using equity manager fees (usually higher) in showing a competitor's. Also be sure you understand the minimum account sizes required by the TAMP. Many TAMPs quote a minimum account size in their marketing material. But that may not be applicable for all managers in their program. If there are specific managers you want to use, be sure to ask what the minimums are for those managers. Look closely at any minimum account sizes quoted for separate account managers that are below $100,000. Managers may handle accounts below this level differently than they manage larger accounts. For example, they might include fewer securities in the account. Inspect the product carefully. Lockwood, for one, is quoting a minimum fee of $25,000 for separate accounts. But smaller portfolios actually use exchange-traded funds instead of individual securities.
Make sure you know where the break points are in the TAMP's fee schedule. A TAMP that looks like the low-cost provider for a $250,000 account isn't necessarily the low-cost provider on a $2 million account. And be sure to evaluate the level and quality of the services you are receiving.
Another important part of your due diligence effort is to make sure you understand the full range of a TAMP's service and support offering. Find out, in detail, how the TAMP can make your practice stronger and more efficient. Give special attention to the quality and frequency of a TAMP's communications. Ask to see samples of the regular, periodic publications a TAMP provides. Also ask for samples of event-driven communications, particularly those relating to developments affecting managers. One of the great services a TAMP can provide is to be the vigilant watchdog who lets you know of important events that might affect your clients' portfolios.
Beyond such nuts-and-bolts issues comes the question of corporate culture. Some TAMPs come from a wirehouse background (Lockwood; RunMoney.com), some from financial planning (Asset Mark; Assante), some from money management (Advisorport.com; Envestnet.com), and others from institutional consulting (SEI; PMC). Firms with a strong wirehouse heritage tend to reflect the product-driven sales culture of their ancestors. Firms with roots in financial planning have a sensitivity to practice management issues and offer strong marketing support. Firms with institutional consulting roots tend to focus on research and analytics.
As the competitive environment heats up, you may find that a TAMP can provide some of the muscle you need to keep pace. But working with a TAMP is not like buying shares of a mutual fund that you can sell tomorrow. A good TAMP becomes a teammate with whom you will develop a close, long-term business partnership. Treat the decision to work with a TAMP as a decision that could significantly affect the success of your business. It truly can.