Every now and then you get a glimpse of the future–when you’re presented with a new fact or idea that causes other bits of information floating around in your brain to tumble into place, forming a clear picture of where things are going. I had such an experience at the Thornburg Wealth Management Conference here in Santa Fe this October. That conference is always good for me, both because it’s a local event, and I get to spend a few days with some of the smartest wealth managers in the country. I usually find nuggets for at least a column or two.
This year, I was confronted with two new facts that, when combined with two notions I already held, caused a slight, but significant, realignment of my worldview. The first was that a surprising (to me, anyway) number of advisors are now offering some kind of healthcare services to their aging client bases. In fact, in a survey of the attendees we conducted for the open forum session I moderated, 85% of the advisors said they offer healthcare services. Granted, the 30 or so advisors present represent a pretty small sampling, and as I said, they tend to be on the cutting edge of the profession. Still, 85% is such an overwhelming number that it leads me to believe that many of you are offering healthcare services, too.
The second perspective-altering fact came from Thornburg Securities president Ken Zeisenheim, who’s been in the industry as long as I’ve been covering it, and has been a great source of insight and information to me over the years. Ken pointed out that in response to the FPA’s victory over the SEC on the so-called Merrill Lynch Rule, the Wall Street wirehouses are enabling their brokers to avoid the fiduciary duty of investment advisors by having them sell third-party portfolio management services. A classic example of the law of unintended consequences.
The Competitive Threat
What Your Peers Are Reading
Wall Street, of course, has tried package management before: in the form of ridiculously loaded wrap accounts, which proved uncompetitive even to the unsophisticated public eye. But this time, as they say, things are different. The New York marketing mavens have come up with a far more attractive formula: Third-party portfolio management by major institutional money managers and global private banks, firms that most clients couldn’t get to manage their money unless they had a lot more money. Ken’s question was: what will independent advisors do to compete with that?
So combine these now-available money-managers-to-the-wealthy and new healthcare services needed by older clients with two other items that we already know: While numbers of clients and revenues are up, profit margins at independent advisories are being squeezed (by employees, technology, and new, costly services) like never before; and, at least in my opinion, independent advisors don’t charge enough for their services to begin with. What you get is a vision that to compete with Wall Street, cut overhead costs, increase fees, and support new healthcare services, independent advisors, too, are going to have to turn to third-party portfolio management.
Now, before you go off on a rant about another layer of fees, high-priced products, client stealing, and the fact that you can manage portfolios as well as anyone, let me make a confession: I’ve always thought third-party portfolio management was a dumb idea for independent advisors, too. In fact, when the late, great Lynn Hopewell told me over ten years ago he was turning his client portfolios over to a third-party manager, I have to admit I thought he was going ’round the bend. But as in so many other ways, it turns out Lynn was just ahead of his time.
I’m not saying someone else can manage your client portfolios better than you can. I’m suggesting that just like answering the phones, executing trades, and writing financial plans, screening mutual funds and monitoring their performance might not be the best use of your time. Hiring someone to do those things might not be the best use of your resources, either. In an era when employee costs are rising faster than profits or revenues, it’s time to take a hard look at all the labor-intensive tasks performed by advisory firms to see if they can be effectively outsourced to someone else. I know it’s hard to hear, but portfolio management, as probably the most labor-intensive task handled by you or your staff, shouldn’t be a sacred cow.
Charging What You’re Worth