From the June 2008 issue of Boomer Market Advisor • Subscribe!

Align yourself with the pros

The old "time is money" adage may be overused, but it's still apropos in advisory circles. Professional advisors who find ways to spend more time cultivating and maintaining client relationships and less on day-to-day operational activities give themselves a greater chance of growing their businesses over the long term.

"There are two rules we preach to advisors," says Steve Onofrio, senior managing director of SEI Advisor Network, which provides third-party investment management and operational support to a large network of independent advisors. "The first rule is to always be meeting with your clients. The second rule is to always remember Rule Number One."

One of the most effective ways for practices to free up time for their advisors to focus on their core strengths is by outsourcing various facets of their operations. And one of the first areas they look to outsource is asset management, says Philip Palaveez, principal at the Seattle-based financial consulting firm Moss Adams. The firm analyzes factors that influence the financial performance of advisory firms via its annual "Financial Performance of Financial Advisory Firms" study. Asset management outsourcing is particularly prevalent among firms with revenues of $2 million or less, he says. "They are outsourcing extensively. That's been the case for the last three or four years."

The bottom-line benefits of outsourcing money management responsibilities are well-documented. In its 2006 survey, Moss Adams found that the most successful practices, large and small, spend less time on operations such as portfolio management. Research focusing specifically on advisory practices that use SEI as an outsource revealed that median income for firms aligned with SEI was 86 percent higher than revenues at firms not using an outside asset manager. Also, median assets under management per firm were 46 percent higher among firms aligned with SEI.

"Investors in general want their advisors to spend more time with them and less time on back-office stuff," explains Onofrio. "Outsourcing creates huge time-savings that allow advisors to do just that. It also frees them to create more capacity for their organizations, and it helps practices that are adding services to streamline their operations."

Outsourcing asset management responsibilities can save money, too, notes Matt Goetzke, CFA, principal at Mendota Financial Group, a wealth management firm in Madison, Wisc., that employs several outside asset managers.

"It's very, very expensive to hire talent to manage equities in-house. Outsourcing keeps us from having to hire two or three CFAs. That saves us a huge amount of money." What's more, says Goetzke, third-party asset managers "can do a better job than we could do managing money because they have the expertise and the infrastructure in place, and they do this everyday." Who's outsourcing what?

The best candidates to outsource asset management, according to Michael T. Doyle, director of marketing at Aurora Investment Counsel, an Atlanta firm that offers investment management services, are advisors in small or solo practices who find there are simply not enough hours in the workday to capably manage assets.

Outsourcing is also common among practices centered on holistic financial planning. Practices that focus on big-picture, long-term planning but manage client investments internally could be inviting trouble by fostering unreasonable short-term performance expectations among clients, Onofrio says.

"If they're selling performance as a key element or tenet of their value proposition, they are introducing a lot of volatility into their client relationships and into their businesses."

Firms that manage assets internally, Onofrio notes, are susceptible to straying from their core investment strategy if a key portfolio manager leaves. Having an outside management firm insulates a practice from that risk. Continuity on the asset-management side is important not only for meeting long-term client investment goals, it's crucial to a practice's succession planning. Firms with a track record of delivering strong, consistent asset-management performance tend to be easier to sell than those with a checkered history in that area, he says.

For these and other reasons, firms like Mendota Financial Group choose to outsource all their asset-management responsibilities. Others pick their spots to outsource.

"What a couple of big shops are doing," explains Onofrio, "is segmenting their clients bases into high-net-worth and ultra-high-net worth, then outsourcing portfolio management with the high-net-worth segment so they can spend more time with the ultra-high-net-worth clients, where the instruments and strategies tend to be more esoteric."

Partner hunting

To reap the benefits of outsourcing, a practice first must find a suitable outside manager. The goal is to find a manager whose strategies, processes, infrastructure and personnel mesh well philosophically and operationally with the practice. A practice that is diligent in evaluating potential outsource partners ultimately stands the best chance of forging a successful long-term relationship, Onofrio asserts. Here are some suggestions from the experts for finding the right match:

  • Start by assessing the kind of manager you want: a home-run hitter or a singles-and-doubles guy? An equities specialist, a fixed income expert or a manager versed in alternative investments?

  • Narrow the field down to several firms and interview the finalists extensively.

  • Look for a manager with a stated investment policy, a well-defined process for implementing the policy and the results to demonstrate the policy works as advertised.

  • What does the outsource firm offer in terms of portfolio reporting and online accessibility to account information?

  • Look closely at the quality and compatibility of the firm's investment management platform and of its back-office operations.

  • Ask about tenure and continuity within the outsource firm's portfolio managers.

  • Ask to see data documenting how the manager has performed in various market cycles.

  • Inquire about value-added services such as practice management.

  • Fees: what are they and how are they structured?

  • Ask for references that show the outsource's capabilities and performance working with a firm similar to yours.

  • Find out the extent to which the outsource manager is willing and able to interact with your clients, if necessary.

  • Look for an outsource firm whose approach is flexible and unbiased.

  • Does the outsource firm offer advisors direct access to portfolio managers? Some practices want the ability to go directly to money managers.

  • Are you comfortable and confident having the outsource firm as an extension of your own practice?
How are the managers managing?

The true test of any outsource relationship is performance. Is the outside manager delivering as promised, not only in the returns it is earning but also in the services and support it is providing the practice? Since the goal of outsourcing asset management in the first place is to lighten, not increase, a practice's workload, monitoring and managing a manager should be a straightforward, time-efficient exercise for an advisory firm.

"We conduct exhaustive due diligence once a year on our outside managers to make sure they are doing what they say they are doing," explains Goetzke. "Otherwise we generally try to stay out of their way. We have to trust their expertise."

Here are a few ways to take stock of an outsource relationship:
  • Are the lines of communication always open to talk formally and informally with the outsource firm? The best relationships are built on regular constructive dialogue, says Doyle.

  • Has management at the outsource firm been accountable and accessible?

  • Are reports delivered on time to clients and the practice?

  • Are check requests and queries handled promptly?

  • Are the manager's activities consistently fully transparent?

  • Has the management firm remained true to its investment approach?

  • Portfolio performance. A practice should have access to periodic reports assessing how the manager is faring relative to various benchmarks.
"At the end of the day, this is a performance-driven environment," says Doyle. "If we say we're going to provide 300 or 400 basis points of alpha over a full market cycle, that's what we better produce."

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