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How an Advisor Can Outsource Money Management While Staying Involved

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Last week I discussed some of the benefits of outsourcing the asset management component of an advisor’s business (When Outsourcing Investment Management Makes Sense). I mentioned in the blog that while outsourcing often makes sense, there was a small wrinkle which I would touch on this week.

Outsourcing part or all of one’s asset management business is an important decision for any advisor. In my last posting, I discussed the expense of outsourcing and how it can reduce your revenue unless you raise your clients’ fees. Moreover, it is influenced by a number of factors, including the need to be in control and the desire to do my own research and actually manage assets.

Both of these issues are important to me.

On the control front, I have always been concerned that if the markets were to plummet again, as they did in 2000 and 2008-2009, I would like to know that the asset manager will not just let the accounts decline, sticking to the model’s allocation. In short, I’d like some assurance that the manager is going to do whatever possible to minimize losses.

The particular separately managed account I’m considering took that prudent course in 2008. Specifically, the managers reduced their stock exposure a bit, down closer to 30%, but invested heavily in long-term government bonds, one of the few asset classes that did well that year. As a result, it ended the year with a negative 5.50%, which is not too bad considering the financial markets nearly collapsed.

The second issue is my desire to manage money. Although I do love to manage money myself, it can take a lot of time. Here’s the wrinkle I mentioned. If I decide to outsource my asset management, I would retain some percentage of the accounts I outsource. For example, using a minimum of $125,000 to be considered for the SMA, I would retain 20% or 30% of the account and buy stock ETFs on the dips and use trailing stop orders to protect the downside.

Hence, the outsourced portion would be invested in a SMA with a chosen allocation (i.e.; conservative, moderate or aggressive) and the retained portion would be tactical using ETFs and TSOs. There is one more issue to consider, but it’s not that significant. 

Let’s assume I take a $125,000 account and allocate $100,000 to the SMA, retaining $25,000 for the ETF strategy. In doing so, the account would have to be divided into two separate accounts, one for the SMA and the other for the tactical ETF portion. If the account was an IRA there would be two annual custodial fees of $15 instead of one. However, since the additional fee is minimal, it’s not much of an issue. This approach would allow me to focus all of my efforts on my ETF strategy, financial planning and business development. We’ll see how it works out. 

In next week’s blog posting, I’ll address the topic of mutual funds versus ETFs.

Stay tuned.


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