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Advisors Increasingly Outsource Asset Management: Tiburon

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As more financial advisors consider moving to a flat fee-based business model, they may want to outsource their back-end administrative and investment management functions to a turnkey asset management program or TAMP.

TAMPs can be offered as stand-alone products or as a platform in which financial advisors can direct clients’ retirement savings to different investment models for a fee. Fees are typically low because they are spread across all of the assets managed.

As the world of financial advice gets more competitive, TAMPs are a way for financial advisors to do what they do best, which is interact with clients and help them make the best financial decisions for their retirement.

TAMPs got their start back in the 1980s with a handful of companies offering outsourced investment management services, but they have really taken off in the past decade, as more advisors move away from the broker model, according to data compiled by Tiburon Strategic Advisors, a consulting company to financial institutions based in San Francisco.

There are 34 TAMPs serving 1,000 institutional clients and 20,757 financial advisor clients, a major increase since 1995, according to Tiburon. These programs have $147 billion in assets under management and administration and generate $166 million in revenues, up more than 900 percent since 1996, but down from a peak of $340 million in 2007, Tiburon found.

“This is definitely an area that’s growing. I think it will continue,” said Vern Sumnicht, CEO of iSectors, which outsources ETF investment strategies, and founder of wealth management firm Sumnicht & Associates in Appleton, Wis. “I look at it like this, an advisor’s currency is his time, and an advisor has to look at that currency and see where the best place is to invest that currency and what has the best rate of return.”

Clients want to have more interaction with their financial advisor. They want to be able to pick up the phone and call them whenever they have a question. But, if those advisors are doing everything themselves, including meeting with clients, managing their money, conducting research on mutual funds and asset management, they might not have time to give clients the attention they deserve, he said.

Good TAMPs provide back-end reporting, administrative and accounting services along with their investment management options, Sumnicht said.

Sumnicht was an early adopter of a turnkey asset management program. At first he felt guilty about it, like he was doing his clients a disservice, particularly those clients who came to him because of his investment management capabilities.

What he realized after changing his first couple of clients over to a TAMP is that they didn’t mind and the TAMP was doing as good of a job or better managing his clients’ retirement money than he had been doing.

The only risks Sumnicht sees to outsourcing to a TAMP is the perception risk. There are “perceived risks or fears and I think the bottom line is that it all boils down to change. Employees don’t like change. Advisors don’t like change.”

He started his career as a commission-based stockbroker. He had the same type of fear when he decided to leave that business model and move to a fee-based model.

When he started thinking about outsourcing his investment management capabilities to a TAMP, his biggest fear was losing a lot of clients. He also said that ego played a major role in his trepidation.

“You’ve got your pride tied up in your ability to pick stocks, do asset allocation, due diligence and you are saying to yourself if I outsource this sort of thing, you feel guilty. What the heck am I going to bill clients for if I outsource all of this stuff,” Sumnicht said.

What he found is that by moving to a TAMP he didn’t “abdicate” his responsibility as a financial advisor, he just gave himself more time to work with his clients to find out what types of investments would work best within their personal financial plan. And even though he signed on with a TAMP, there were so many investment options offered through the TAMP platform, his clients still needed his help deciding which would work best for their age and risk tolerance.

One big benefit to working with a TAMP is that individual financial advisors don’t have to buy a platform or build one from scratch. And, although it can still be time-consuming managing the data that gets entered into the TAMP’s database, it is still a lot easier than starting from scratch, Sumnicht said. Platforms also allow clients to get into their accounts electronically and see what they are doing on a daily basis.

These systems also print out quarterly reports. Sumnicht says his team spends a lot of time merging TAMP client reports with other client assets so individuals can get a more robust picture of how they are doing financially.

Good TAMPs have three main components: technology, investment products and business building assistance, Tiburon said. Envestnet, FolioDynamix and Pershing Managed Account Solutions have some of the best technology platforms in the business, according to Tiburon’s report on turnkey asset management programs.

Many of them offer financial planning and risk profiling, investment net and reporting solutions and many value-added tools to complement their investment services.

The most successful TAMPs have a broad range of product offerings, although two-thirds of TAMP assets are still with mutual fund TAMPs, Tiburon found.

Tiburon predicts that platform TAMPs will continue to dominate the market with many wirehouses outsourcing technology to these programs. It also believes additional distribution opportunities will emerge, there will be an infusion of private equity and consolidation of TAMPs will take place.

More than three-quarters of financial advisors using TAMPs earned net profits of more than $100,000 last year, Tiburon found. Among financial advisors who didn’t utilize TAMPs, just over half earned more than $100,000. One-fifth of financial advisors who use TAMPs believe their income will reach $500,000 or more in the next year.