When Outsourcing Investment Management Makes Sense

Over the past several years, I've been wrestling with a couple of issues. The first is outsourcing a portion (or all) of my investment management duties. The second is transitioning away from mutual funds and using more ETFs. In this post, we'll discuss the first issue and next week, we'll cover the second.

Outsourcing Your Portfolio Management

Outsourcing has two significant points to consider. First, it will free up your time so you can concentrate on marketing, financial planning or whatever else you choose to do. And, when you go on vacation, you'll know the money is under the care of a quality management team. These are positives in my view.

On the other hand is the consideration of cost. If you hire an individual or firm to manage your client accounts and they simply use mutual funds or ETFs, the fee they charge will reduce your revenue unless you increase the fee your clients pay. It is this latter issue that has caused me to stay with the status quo. That is, until recently.

Is Outsourcing Cheaper?

Over the past several years, I have been using a particular conservative allocation fund for smaller accounts, and at times, I've compared its performance to some portfolios I manage. Sometimes I win, sometimes I don't. However, after six years of monitoring this, I am sold on this company's track record, investment philosophy, etc. Hence, I plan to use their separately managed account (SMA) platform soon.

Moreover, it will effectively reduce the fee to the client and not my bottom line. How? In their SMA, they will invest in individual stocks and bonds. When you consider the fee they charge for their SMA (0.50%) and include the basis points levied by my custodian (0.05% to 0.25%), the client will be paying less compared to this company's retail mutual fund which has an expense ratio of just over 1%. Plus, the custodial fee in the SMA includes all transaction costs. Hence, I will earn the same revenue and the client will pay less. It's a win for everyone involved. But these are not the only reasons for my decision.

Does Outsourcing Increase the Value of a Practice?

Outsourcing may make your practice more valuable since the portfolio management won't hinge on you. In other words, if something were to happen to a solo practitioner, who's left to manage the accounts? Although I don't get this question a lot, I have had a number of clients and prospective clients ask what would happen if something were to happen to me.

There's another wrinkle in this that I will share with you next week. At that time, we'll also tackle the second item mentioned above, that of transitioning from mutual funds to ETFs. There's a very interesting thing that happens with ETFs that I've just discovered. It's somewhat significant and can help you attain a lower purchase price (no, it's not a limit order).

Until then, thanks for reading and have a great week!

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