Benefits For Both Client and Advisor
TAMPs are expected to manage around $4 trillion in client assets by the end of 2019.1 With seemingly every custodian, platform, asset manager and influencer pushing TAMPs, that is certainly no surprise. However, a major point of discussion about TAMPs is the primary reason for outsourcing investment management.
Advisors yet to “jump ship” from managing their clients’ money themselves often consider several key questions.
- How can I justify charging my client an additional layer of fees (and does it mean I’m violating my fiduciary duty)?
- My clients already have signed investment management agreements, with a stated management fee – what now?
- How do I afford introducing another party’s compensation into the client’s costs?
- Money management is my differentiator, and I’m good at it, so why would I outsource it?
- I have presented myself as a money manager to my clients, how do I unwind that?
Better Planning and Greater Value Add
While advisors are often drawn to TAMPs due to the ability to offload a significant amount of work for themselves, a study by Fidelity recently found that the number one reason advisors and firms chose to outsource investment management was to increase their value-add to clients.2 Through offloading the advisor’s workload, a TAMP allows advisors to provide more holistic, focused, financial planning services.
Despite the ability to offer these supplementary services to clients, the additional layer in fees due to a TAMP may initially create confusion for the client. This discussion, however, will create transparency as well as a wall between the advisor and the portfolio returns, which can prove to be a significant advantage in the event of a downturn, or if client investment objectives change.
Navigating the Fee Discussion
Discussing fees will also be a step toward signifying to the client that the advisor is now more focused on meeting and exceeding their long-term financial goals, rather than just achieving market returns. Modern-day advisors are expected to be more than a traditional Wall Street money manager and migrating to a TAMP allows the time to meet this expectation.
Due to the traditional nature of an advisory role, several advisors are highly-skilled money managers and outsourcing to a TAMP may seem like the loss of a differentiator. Naturally, this is another objective for TAMPs and advisors to overcome.
Deepening the Advisor-Client Relationship
Advisors who are portfolio managers often feel pressure to drop their fee if they are to offload what was once their differentiator, creating more confusion over why a TAMP is necessary. However, upon adopting the use of a TAMP, these advisors will now be able to use their increased time away from the trading desk to deepen client relationships and diversify their services.
As mentioned earlier, deeper client relationships will result in further understanding their clients’ holistic financial goals and therefore allow the advisor to meet and exceed them. In doing so, the advisor is adding a significant level of value. Due to the increased breadth and depth of holistic services offered to their clients, advisors should be able justify the additional layer of fees to their clients.
In addition to fees, several advisors often question why they should offload their money management, given their ability and returns. The answer is both volatility and time.
With the past 10 years having been a bull market, nearly everyone’s been a winner. However, in a downturn, accounts that are managed on a “oneoff” basis by advisors, are more likely to significantly struggle as opposed to managed accounts of investment advisors.3 With the much awaited (rather, undesired) return of volatility to the market, an increasing number of advisors are finding the need to trade or reallocate client accounts as a painful experience which hampers their ability to focus on planning.
Managed accounts offer greater flexibility and speed about wholesale changes in portfolios, which advisors often find difficult to match. Due to an investment committee, there are more “eyes on the ball” and all accounts are traded at the same time, rather than a traditional advisor, who would need to trade accounts individually.4 The advantage of a focused investment strategist and trading team of a TAMP can significantly benefit a client’s returns, not just the advisor’s day-to-day.
Not just for the Advisor, but for the Client, too
Of course, a major reason for migrating towards a TAMP are the benefits to the advisor, however, it is important to remember the long-term advantages the client will also gain. All-too-often, we are too caught up in the advisor’s advantages of using a TAMP, that we do not focus on the significant benefits clients can gain.
An advisor with increased time to focus on a greater understanding of their client’s holistic finances will be able to provide a greater level of service and ultimately, help them to achieve and exceed their financial goals.
- Better financial plans
- Increased Value Add
- Deeper Advisor-Client Relationships
- Lower Volatility
- Operating Efficiencies
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