Executive Summary
As the trend towards financial planning as the primary value proposition for financial advisors continues to gain momentum, one of the biggest challenges that emerges is freeing up the time to provide that financial planning advice to an ever-growing number of clients. As all growing advisory firms eventually get to a point where there just isn’t simply enough time in the day to devote to nurturing client relationships (and developing new ones) and do all the other stuff necessary to make the business actually happen! Accordingly, one of the most cost- and time-efficient ways to increase the time an advisor can spend better servicing clients is by outsourcing the process of implementing (and managing) investment planning recommendations to a TAMP, or turnkey asset management platform. Yet for those advisors who do decide to outsource their investment management, the question then becomes, with the dizzying array of TAMPs on the marketplace, how do you determine which one is best (or at least, best suited to the individual advisor’s needs)?
Accordingly, in this week’s #OfficeHours with @MichaelKitces, my weekly broadcast via Periscope, we examine six areas of due diligence questions to consider when choosing a TAMP, how to understand the real costs of TAMPs, and the various ways advisors can position the cost of paying for a TAMP’s services (alongside the advisor’s own advisory fee).
Of course, as an outsourced investment management platform, one of the first (and most important) questions to ask any TAMP provider is about how they approach investments in the first place. Because all investment management firms have some sort of philosophical preference…. and without getting into the merits of one strategy over another, the reality is that whatever approach a TAMP uses is going to become your approach if you use that TAMP. Which means, ultimately, you as the advisor are going to be the one responsible for not only selling that investment philosophy (and process) to your clients, but also defending that approach when the inevitable bear market or stint of underperformance occurs. So be certain the TAMP’s philosophy is one you’re ready and willing to defend… and that the TAMP has a process to execute that philosophy, and a performance track record to validate they can deliver!
From a more nuts-and-bolts perspective, other key points to consider when evaluating a TAMP include: make sure that the TAMP is approved on your platform (if you’re under a broker-dealer), or that the TAMP can work with your custodian (if you’re with an RIA); what sort of additional technology do the various TAMPs offer (because there is a wide variety amongst providers, with some offering their own proprietary solutions, others not offering any, while still other TAMPs bolt on other third-party platforms); and what amount of additional staff support does the TAMP offer (or not), including administrative services, investment research, and marketing support.
And don’t forget that you need to determine how much the TAMP actually costs. As with anything, you get what you pay for, and at least in the TAMP marketplace, the pricing usually coincides with the level of service and support that’s provided. But, some TAMPs do price higher than others, and you need to factor in the expense ratios of the investment products they use as well, which get stacked on top of the TAMP’s base fee and can materially impact the all-in cost to your client!
Finally, bear in mind that if you plan to use a TAMP, you have to figure out how you’re going to pay for the TAMP. Some advisors simply treat the TAMPs fees as an additional cost to the client over and above their own management fee (just as the client would have paid a mutual fund manager’s expense ratio above-and-beyond the advisor’s own fee), while other advisors treat the TAMP’s fee as a business expense (because they would have otherwise had to hire and pay staff to see to those duties) and pay it from their own advisory fee, while other advisors “share” the fee with their clients, tacking on only a portion of what they’re paying the TAMP and absorbing the rest of the fee themselves (in lieu of the other staff they would have had to hire anyway).
Ultimately, the key point is that it’s important to spend time taking a deep look at each TAMP provider to make sure that you’re both a good fit for each other, both from a pure philosophical investment viewpoint, and with respect to the technology and other support services the TAMP does or does not offer (which you may or may not need!), and make sure that their offerings address the needs of your clients and how you want to run your business. No one TAMP is the best solution for every advisor, and it’s worth your time to do the due diligence to find the right one for your current and future needs in serving your clients.
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Well, welcome, everyone. Welcome to Office Hours with Michael Kitces.
For today's Office Hours... So I should say, well, back last year on Office Hours, we talked about the rising trend of advisors focusing more and more on financial planning to the point that many are just outsourcing investment management altogether. And that trend has only continued, I find, as financial planning continues to grow and creating asset allocated diversified portfolios is becoming increasingly commoditized. And so today I want to talk about something a little bit more granular, which is how do you actually choose which TAMP to work with in the first place?
So we had this recent question coming from Meredith who said, "Dear Michael, I'm breaking away from a broker-dealer and opening my own RIA in May with about $40 million of assets and have decided that I want to work with a TAMP to outsource my investments. So I've been doing research on five different TAMP providers, and they all have their own little nuances, so I've made spreadsheets to break out their capabilities and their fees, but I want to make sure that I'm asking the right questions. What should I be asking?"
So this is a great question, Meredith, and one that I find is very common for firms at your size. It's usually somewhere around the point between about $300,000 and $500,000 in revenue, which is, you know, usually about $25 million, $50 million of AUM, depending on what your AUM fee is, where a lot of advisory firms tend to hit a wall. And there are enough clients to manage on an ongoing basis that you have to make this decision where either you're going to reinvest profits of the firm into a full-time staff member to handle all that trading and investment management research and support or outsource to a TAMP instead, right? And there's nothing like that moment where you've got to hire a staff member to decide, "Am I going to hire this staff member and many to come or am I going to outsource this instead?"
So what kinds of questions should you be asking? You know, I've actually been involved over the years in building more than one TAMP myself, so I find there are a couple of common due diligence questions that fall into sort of six broad categories. So number one is what is your investment philosophy, process, and performance? Number two is what platforms do you work with or can you work with? Number three is what technology do you provide to support my advisory firm? Number four is what additional staff and support services do you provide? Number five is what is the cost? And number six is what is your ideal advisor profile in the first place? Like, who do you typically work with?
Finding The Best TAMP Investment Philosophy, Process, And Performance [02:45]
So let me dive into each of these in turn in a little bit more detail. So the first question to ask anytime you're evaluating a TAMP is to find out what I call their three P's: philosophy, process, performance. So the starting point is what is the firm's investment philosophy in the first place? Are they passive? Are they active? Are they more tactical? Are they more strategic? Do they like using mutual funds and ETFs? Do they prefer holding a lot of alternatives? Do they like to tilt domestically or internationally or towards larger, smaller, growth or value? Virtually all investment management firms have some kind of investment philosophy, some sort of worldview about how investment markets work, where the opportunities are or not, how efficient markets are or not.
And I'm not here today to have the debate about which investment philosophy is right or wrong or have the active versus passive debate. But the key point is simply that whatever their philosophy is is going to become your philosophy. Because you're going to need to explain their investment approach and philosophy to every new client you work with. And when that inevitable stint of bad performance comes or a bear market occurs and clients are asking those hard questions, you will need to defend that third-party investment manager and their results because you put your clients into it. So you'd better believe what they believe. Because if you're not comfortable defending their questions to your clients, this isn't going to go well for you when your clients are asking the hard questions.
And of course, it's not just about their philosophy alone and whether you agree with it, there's also the question of their investment process, the second P. Do they have a clear, consistent, repeatable process about how they'll manage investments and execute so that you can have reasonable confidence that whatever it is they do they will continue to do and that your clients won't be surprised that they went outside the lines of whatever it was that was expected? All good investment management starts with a good investment process and so they should have one that you also have confidence in and believe in.
And the third P is simply, what is their performance? You're hiring them to be an investment manager, are they any good at it? Do they have a GIPS-compliant track record to show how they've done? Have they done well relative to their benchmarks? Did they lag their benchmarks? If they lagged, was it by an unacceptable amount because they are a passive manager who might inevitably lag, at least by the amount of their fees, and that's okay because their fees are modest or did they underperform even worse? Or did they beat their benchmarks? And if they beat, was that because of luck or because they have some coherent investment philosophy and a repeatable investment process such that you think there's at least a reasonable chance this is going to sustain in the future?
And again, I can't emphasize enough that even the best investment manager will have tough times at some point, either because their investment strategy is out of favor or simply because the whole market has dragged down a bear market. And when that happens, the client asks hard questions. And so our performance is never guaranteed. At a minimum, you have to be confident that you buy into and are willing to defend the TAMP's investment philosophy and their process, and that even if there's recent bad performance that you're confident will be rectified or your TAMP is going to make you lose your client. Because clients can sniff out pretty quickly that if you don't have confidence in what you're doing or who you've chosen to delegate to, the TAMP's failure is your failure, and that tends to end a client relationship pretty quickly. So you have to start with the three P's. Do you buy into their investment philosophy? Do you buy into their repeatable investment process, and do they have some kind of performance track record to back this up?
What Broker-Dealers, RIA Custodians, Or Other Platforms Does Your TAMP Work With? [06:24]
Now, the second question of TAMP due diligence is what platforms do they work with? Because not all TAMPs connect to all platforms. So if you're working under a broker-dealer, you'll need to see if the TAMP is approved on your broker-dealer platform. And if not, maybe what it takes to get them approved. Different BDs have different approval processes. If you're an RIA like Meredith who asked the question, is the TAMP ready to work with the RIA custodian you are going to work with?
Now, many or I think even most TAMPs are multi-custodial but not all of them are. So if your clients are at Schwab and they only work with TD Ameritrade, this isn't going to work, or vice versa, if they're only at Schwab and you're at TD Ameritrade. Unless you're willing to move all your clients to a new custodian just to access your TAMP, which you might decide to do, but that's a lot of transfer and repapering work. So you should know what platforms your TAMP works with, and does your TAMP work with your current platform? If you're in transition like Meredith and are already eyeing a particular TAMP, make sure you choose a platform that your TAMP works with.
And clarify whether they're available directly or only through a third-party like a broker-dealer or a managed account aggregation platform like Envestnet. Because the reality is that buying a TAMP or a separate account manager through someplace like a broker-dealer or Envestnet often has an additional cost, because that intermediary has to get paid. Now, that's not saying there's anything nefarious about it. Those platforms are providing a distribution and access service and often some level of due diligence as well, so they're entitled to get paid, but you should know whether you're accessing your TAMP directly or not and whether or how that's impacting the cost you're paying, and whether it would be both feasible and cheaper to connect with the TAMP directly, if you even can. Not all TAMPs have a direct relationship. But that's why understanding what platforms they do or do not work with matters so much.
What Technology Do TAMPs Provide? [08:18]
Now the third question for TAMP due diligence is what technology the TAMP provides. This is an area that has a lot of variability. So some TAMPs provide access to like a full suite of technology tools. They might give you Envestnet's Tamarac or Orion or some other third-party performance reporting tools and client portal. And maybe they also give you an investment proposal tool and a risk tolerance tool like FinaMetrica or Riskalyze. Some larger TAMPs, in particular, have built their own proprietary technology. They have their own tools that are fully integrated in the rest of their systems and processes, a provider like SEI. And some TAMPs actually provide very little in the way of technology and just say, "Look, we're here to run the models and trade your clients and be sure they're investing into the models, y'all use whatever technology you want."
Now, none of these are necessarily better than the other. If you're an independent-minded advisor, you might prefer a TAMP that just does the trading, lets you pick your own technology or that connects you to a third-party technology platform like Orion. So if you decide to leave the TAMP, you can keep Orion and just pay for it yourself. You don't have to migrate systems. Other advisors don't want to deal with all those technology decisions and responsibilities. They just say, "Give me a platform that works, I use your technology, as long as it's easy, and it works for me," and may prefer that all-in-one technology experience of a TAMP's own proprietary and custom technology.
I think of this kind of like the Apple versus Google smartphone decision. So some people are really independent-minded. They love Google's Android open architecture system. They like the flexibility. They want the choices and additional layers of customization. Yeah, it takes a little more effort to set up, but they can make it the way they like it and that's what they want. Other people prefer Apple and the walled garden experience. Step inside of Apple's nicely tended garden where everything just filter and screen up front and it just works. And it's easy to use because they built it that way. And you may have fewer choices, but who cares because it works and you rather direct more of your focus on other areas than all this technology stuff anyways. So again, there's no right or wrong answer here except that if you prefer more tech control, pick a TAMP that leaves you with more tech control. And if you don't care about that and you may be happy with the TAMP that provides the tech on your behalf then pick a TAMP that provides the tech on your behalf. So find the one that fits your style.
What Additional Staff Service And Support Do TAMPs Offer? [10:33]
The next TAMP area of due diligence is understanding what kind of additional staff service and support the TAMP offers. Now, this is an area that actually varies even more than the technology variability is. While it's common that TAMPs would at least do the actual trading stuff for you, that's the whole point of the TAMP service, for some TAMPs, that's all they do. Other TAMPs may provide additional back-office support, particularly in the area of client service administration, so someone that helps with the account opening forms and the transfer paperwork. Now, depending on your staff infrastructure and what do you already have, you may or may not care about that. Maybe you've already got your own client service administrator for that paperwork and you just want to outsource the investment management and trading part. Or maybe you don't have the staff, you don't want to hire it and you would love to outsource all of that client service administration and support work.
Another area TAMPs differ is how much support they'll give you with individual clients and prospects. So some TAMPs have an investment research team that will help you create customized proposals, at least for maybe your more affluent prospects. Some TAMPs have investment experts that will meet with you and your top clients either in person or virtually if you want even more support. Now, again, depending on how deep your investment expertise or how comfortable you are having those conversations or doing those analyses, you may or may not care, but that's the point. If you do care and want that, make sure you find a TAMP that offers it.
Similarly, TAMPs vary a lot in the marketing and prospecting phase. So some TAMPs, as I mentioned earlier, give you technology for investment proposals or provide pitch books or materials to explain their investment philosophy and process or have the training to teach you how to sell and explain their investment management process and philosophy to your prospects. Now, if you're simply trying to outsource so you can have better work/life balance as a lifestyle practice, you might not care about that marketing stuff because you may not even be looking to grow. You just want to serve your existing clients. But if marketing and growth are important to you and you want and need help in this area, well, be certain you understand what kind of marketing support and help the TAMP provides or not.
How Much Does A TAMP Cost, Really? [12:31]
The fifth area to inquire about is cost, right? All TAMPs have some kind of fee for their services and clearly, you should know what it is. Now, historically, a lot of TAMPs cost as much as 75 to 100 basis points, but the recent trend has been coming down lower. And I see a lot of TAMPs today that are more in the 40 to 60 basis point range, some lower price offerings as low as 25 to 35 basis points. And there's even a new TAMP provider called First Ascent that's experimenting with just a flat fee model, like $500 per client account, period, rather than charging basis points at all.
Now, when it comes to TAMP pricing, there are kind of two general concepts I find that you should be aware of. The first is that in the world of TAMPs, you usually get what you pay for. Lower-cost TAMP providers do tend to provide a little bit less of bundled service support, hand-holding technology, some combination, while higher-cost TAMP providers tend to do more. It's not perfect, but it's actually a reasonably efficient market in the TAMP world. The second sort of guiding philosophy is that TAMP business is definitely an economies of scale business. There is a tendency that you get more for your buck, all else being equal, from larger multibillion-dollar TAMPs than from smaller platforms. Now, that's not to say there aren't some great boutique TAMPs that are smaller but provide good service, but I do find in general that, again, TAMPs are a relatively efficient marketplace, higher-cost providers tend to do a little more, lower-cost providers tend to either do a little bit less or be a little bit more targeted.
Now, as long as you're happy with the suite of services you get for what you're paying for, there's nothing wrong with a lower-cost TAMP or a higher-cost TAMP, choose the provider that complements what you already have in your firm and what you need or want from your TAMP provider. But you should know the cost and you should know if it's bundled together or priced a la carte. So some TAMPs have a basis point fee for the investment management but they pass through a technology fee. Some provide additional service support bundled into a single fee, others provide it as a separate fee. You know, you pay this much for the investment management and then this much for the administrative staff on top.
And of course, you have to be cognizant of the underlying costs of what they invest in as well. Do they use mutual funds or ETFs? Do they buy individual stocks and bonds? If it's funds and ETFs, what are those expense ratios? Because that basically gets tacked on the TAMP's fee, which then gets tacked onto your own investment management fee, and you want to be certain that the all-in cost is reasonable to the client. Bearing in mind that while we often talk about like the industry standard advisors charge 1%, that's not the typical all-in fee. The typical all-in fee is about 50 to 75 basis points higher. So if we look at industry benchmarking studies, clients anywhere from a couple hundred thousand to a couple million dollars typically pay about 1.5% to 1.75% all in as a median fee. So the good news is that actually does leave you some room to charge your advisory fee and have the TAMP have its cost with the underlying cost but only if the TAMP's fees are reasonable all in. Otherwise, you will be more expensive and at least you need to be prepared to justify that.
What Is The Ideal Advisor Profile For A (Particular) TAMP? [15:40]
And the last and final question when evaluating a TAMP is simply this, to ask the TAMP, "Who is your ideal advisor and what is the ideal client that they work with?" For instance, some TAMPs have minimums. They might only work with advisors with $10 million in assets or $25 million or more. Others don't require any asset minimums, are more startup-friendly. So depending on where your practice is right now, that kind of dictates who's a good fit for you.
Some TAMPs have more sophisticated investment strategies that are a great fit for ultra-high-net-worth clients but just wouldn't be appropriate for smaller account balances where maybe there's more trading and even a $5 trading fee will chew up the client with ETF costs. Other TAMPs are built to provide simpler strategies for smaller clients getting started and are better suited for younger clientele who just want to participate in market growth at a reasonable cost. And there are a few TAMPs that have very specialized strategies for particular clients, whether it's a bond-only manager that's just built to manage clients' bond portfolios or a TAMP like Asset Dedication that has a particular strategy for retirees pairing together bond ladders with equity portfolios generating retirement income. Great fit if you work with retirees, not so great fit if your clients aren't retirees.
So it's important to clarify whether you as the advisor are the right fit? If you're a $5 million advisor, you may not be happy at a firm that targets $50 million advisors. If you're a $200 million AUM firm that can hire the staff yourself but you want to outsource but you expect a very full-service offering, you may not settle for a firm that primarily works with smaller solo advisors. If you work with affluent clients, you want investment strategies that are a fit for them. If you work with younger next-generation clients, you may want SRI and ESG strategies or other things that are more popular with them. So it's all about the fit for the advisor's firm and what clients they serve. Don't let an overly generalist firm try to be everything to everyone for you, because if you don't really fit their typical client, you're probably going to find it's not a great fit in the future.
How Will You Pay For Your TAMP Provider? [17:39]
Now, as we wrap up, there's one other issue I would note in this decision about picking the best TAMP, at least for your firm, and that's how you plan to position their value proposition and their cost relative to what you charge. Because I find there's a lot of variability around this as well. Some advisors simply say, "Look, most prospects I talk to right now are mutual funds, they pay a mutual fund manager. And instead of that third-party manager, I'm going to put them with my TAMP and the client can pay the TAMP's fee the same way that they pay their current mutual fund manager fee. And then they'll pay my fee for the ongoing due diligence and review of the TAMP platform and all the other planning services that I provide." So in essence, the advisor treats the TAMP like any other investment manager and passes through the investment management costs like any other mutual fund expense ratio.
Now, other advisors say, "Look, I could hire all the investment management people myself, the CFA to do the research and my own investment trader, these would have been costs for my business either way, so I'm going to pay the TAMP fee out of my AUM fee the same way I would have paid the staff out of my AUM fee. It's all bundled together." And I know a few advisors that actually split the difference. They say, "Look, I think a portion of the TAMP's fee is the pure investment management fee that would have been like a fund expense ratio anyways that goes to the client, but a portion is really the staff and administrative cost that I would have paid for my own staff, so I'm going to split the TAMP's fee, where a part comes from my fee and part is passed through to the client. So if I normally charge 1% AUM fee and the TAMP cost 50 basis points, I charge my clients 1.25%. So the TAMP's 50 basis point fee, 25 bps goes to the client, 25 bps comes out of mine, all-in is 1.25%, TAMP gets 50 basis points, my fee drops from 1% down to 0.75%."
Now, frankly, I don't think there's a right or wrong answer here because it depends on what your total fees are and how you're positioning the solution in the first place. I see advisors pass 100% of the fee through saying, "Look, I provide advice on taxes but my client pays the CPA. I provide advice on estate planning but my client pays the attorney. I provide advice on investments but my client pays the TAMP." You can provide advice something and get paid for it and still pay a third-party provider for implementation because advice and implementation are separate. But again, others say, "Look, my fee was already meant to be an all-in fee for advice and implementation, that's how I position myself to the client, so I'm going to pay the TAMP out of my fee because my clients already have said, 'Look, I'm paying you all-in and the implementation is supposed to come out of your fee.'"
So again, it depends on how you position in your first place, but either way, you should have some plan for how you're going to handle the fee and position for the client, especially if you've got existing clients and revenue and this is a new TAMP you weren't using before. Because either you have to explain to the client the benefits and ask them to pay more and pass the fee through to them or you need to be prepared to absorb the cost from your own fees, which may feel like a hit to your advisor income if you're not prepared.
Now, of course, if you were hitting the wall, you were going to have to hire staff to do the work no matter what, so your income, unfortunately, was going to go down temporarily either way until you grow through it again, but you should have a plan about where this fee is coming from, and just understanding that some TAMPs are a little bit more conducive to one approach or the other. If the TAMP really is built to do all-in staff support servicing, it tends to be more expensive, but it may feel more appropriate to absorb part or all of that fee from your fee since they're literally covering your staffing. While other TAMPs are built to be more of, I'll call it an investment-only offering, where I think it is quite reasonable to pass the fee through to the client the same way an expense ratio for a mutual fund pass through for the client and then you get paid your advice fee for the advice that hopefully you're providing is valuable. Otherwise, you're going to get fired anyways.
But in any event, I hope that this is helpful as some food for thought to consider in trying to evaluate the various types of TAMP offerings and the areas where you can and you should compare and contrast them.
So this is Office Hours with Michael Kitces. Thanks for joining us, everyone, and have a great day.
Disclosure: Michael Kitces is an employee of Buckingham Strategic Partners, and also the XY Investment Solutions, which were both mentioned as potential solution providers for advisors in this article.
