The Unbundling Of The TAMP And The Rise Of The Model Marketplace

History of the TAMP

At its core, a “TAMP” (Turnkey Asset Management Platform) provides a combination of back-office support for a financial advisor, and third-party asset management for his/her client portfolios.

The TAMP movement first emerged in the 1980s, as the deregulation of fixed trading commissions in 1975 collapsed the traditional stockbroker business model and financial advisors began the transition from selling stocks to selling investment managers instead. While the bulk of that shift went to the rise of the mutual fund complex, as financial advisors sold the leading mutual funds and their managers, many of those who operated in a fee-based environment adopted TAMP solutions instead.

The appeal of the TAMP, whether adopted as a managed mutual fund (or later an ETF) wrap account, or a separately managed account (or later a unified managed account) holding individual stocks and bonds, was the opportunity to have a third-party investment manager set the investment models and implement the investment trades, but without a requirement for the client’s assets to be pooled with others (e.g., in the form of a mutual fund). Instead, client accounts and the underlying assets were owned individually and directly by the client, and the third-party investment manager simply had discretion to execute the trades necessary to implement the agreed-upon investment strategy in the client’s accounts. From the financial advisor’s perspective, it was feasible to provide clients with an individually held professionally managed investment account, but without the advisors themselves needing to create the investment process and staff their own back office.

To leverage the operational efficiencies available – and necessary – to execute common investment strategies across a large volume of individual client accounts (and advisors), TAMPs quickly become a combination of back-office staffing and technology to support the process (from account opening and transfers, to trading and rebalancing, billing and fee sweeps, performance reporting and compliance), along with the investment management solution itself (either managed directly, or by providing vetting and due diligence on third-party managers for which the TAMP is an intermediary). In some cases, the TAMPs function entirely as a standalone platform and custodian, while in other cases they tie-in to or overlay on top of existing brokerage or RIA custodian platforms. Early players that are still around today include PMC (now part of Envestnet), Brinker Capital, AssetMark, Lockwood, Loring Ward, and SEI, and the TAMP space in the aggregate is estimated at about $250B of assets under management.

Robo-Advisors And The Rise Of Model Marketplace

In recent years, we’ve witnessed the rise of the “robo-advisor”, which threatened (at least in their own words) to replace human financial advisors with automation tools that facilitate the implementation of a (usually passive strategic) asset-allocated diversified portfolio, matched to the client’s particular goals and time horizon.

In reality, though, robo-advisors have struggled to gain market share and watched their growth rates lag in recent years, due to a struggle to attract assets and actually gain market share with the technology they’d built, given the hyper-competitive marketplace for asset management and the incredibly high client acquisition costs it entails. In other words, robo-advisors created an efficient operational solution (digital onboarding and automated trading and rebalancing tools to manage model portfolios) to what is ultimately a distribution problem (how to get your particular managed account solution into the hands of consumers?).

But that doesn’t mean the robo technology itself, as a tool that automates both onboarding, and more importantly the trading, rebalancing, and the management of models, isn’t valuable. For instance, several years ago on this blog I wrote:

“Robo-advisor software as a “trading” tool creates the potential for investors (and/or their advisors) to implement and self-automate their own tilts, filters, screens, trading algorithms, and rules-based investment strategies. Popular strategies (e.g., various forms of smart beta?) could be licensed directly through the platform, allowing any investor to have access to the “strategy” of an investment manager, implemented automatically on their behalf. Or alternatively, investors (or their advisors) could create any number of their own investment strategies as well, and then allow the software to automate their implementation.”

And in just the past month, this exact prediction has begun to play out. First it began at the TD Ameritrade National LINC conference, with the RIA custodian announcing the creation of a new iRebal “Model Marketplace”, where advisors will be able to directly access third-party investment management strategies by having their models uploaded directly into the iRebal trading software for the advisor to implement themselves. Then at the Technology Tools for Today (T3) Advisor Technology Conference this month, Riskalyze announced that its robo-advisor-for-advisors Autopilot platform was launching a “Partner Store” that would allow advisors to use its new trading and rebalancing tools to directly implement the models from a series of third-party investment managers. And then at the same conference, Orion Advisor Services announced the launch of Eclipse, which embedded in its own version of a newly launched trading and rebalancing software platform will include “Eclipse Communities”, where advisors can share their investment models for implementation with other advisors… in a form of (peer-to-peer) model marketplace.

In other words, in the span of barely a month, three different major platforms have all announced the rollout of a “Model Marketplace” where advisors can use “robo” trading and rebalancing automation tools to implement third-party-managed models, without the need to fully delegate to a TAMP. Because, instead of using the TAMP, the advisor can simply use the robo software to implement directly all of the models and trade signals from the investment manager themselves, using the advisor’s existing investment platform!

Delegation Vs Automation And The Unbundling Of The Traditional TAMP

As noted earlier, a TAMP ultimately bundles together two core functions: providing a third-party investment management strategy (i.e., portfolio models), and implementing it (the back-office trading and other tasks to support the investment implementation process). From this perspective, the emergence of Model Marketplaces effectively represents the unbundling of the traditional TAMP.

In essence, the opportunity of a Model Marketplace is to distribute third-party investment management strategies (via their model portfolios) to financial advisors, for the advisors to implement themselves. Thus, the advisor can get access to outside “managers”, and their models, without fully delegating the portfolio management role and the associated discretion; instead, the manager sends the model (and its trade updates) to the marketplace, and the advisor implement it themselves. Except, with the typical modern trading and rebalancing software for financial advisors, the implementation itself becomes largely automated anyway!

Of course, that still requires the financial advisor to retain responsibility for configuring and implementing the trading and rebalancing software itself. Client accounts still have to be onboarded by the advisor, loaded into the rebalancing software, and assigned to the model. And the advisor still must (or at least, should want to) review the suggested model trades (when the model changes) and “hit the button” to authorize the model trades in client accounts that the software queues up.

Nonetheless, Model Marketplaces fundamentally change the decision-making process about using a TAMP in the first place. Now, it’s no longer a question of “create and manage your own investment process and implement it, or delegate it all to a TAMP”. Instead, for those who want access to outside managers, now it’s simply a question of “do you want to retain control to implement the third-party investment models yourself (the so-called “Rep as Portfolio Manager” [Rep-As-PM] approach), or delegate to someone else to handle the trades and other back-office work of those third-party models too (with a full-TAMP solution)?”

In other words, it’s no longer a decision of “fully retain control” or “fully delegate” the process of investment model building and implementation. The Model Marketplace introduces a hybrid option – to select from third-party investment models, but retain control about whether/how to implement them, while using technology to ensure that implementation isn’t onerous.

Opportunities For Investment Distribution Of Managed Portfolio Models

Notably, the rise of the Model Marketplace isn’t solely a function of “robo” rebalancing and model management technology tools making it feasible to implement. It’s also being driven by asset managers themselves, who are seeking new ways to drive distribution into increasingly commoditized ETF and index fund products (that aren’t themselves very differentiated), and to generate additional revenue given the competitive cost-cutting happening to the underlying investment products themselves. In other words, asset managers are struggling to gain market share and make money on the underlying investment products themselves, and instead are looking at model management as an opportunity for both fund distribution and a new layer of management fees.

This business model was also indirectly validated by the “robo” movement, as the rapid growth of Schwab Intelligent Portfolios – using a preponderance of Schwab ETFs – demonstrated that it’s feasible to distribute managed models of otherwise-largely-commoditized ETFs as a way to grow market share and revenue. Of course, Schwab itself has (so far) offered its managed account service for “free” because its underlying ETFs are still profitable, but the validation that “robo”-managed accounts can help to distribute ETF products, and the potential to charge for the ETF strategies they manage, helped to drive a fully of robo M&A, including Blackrock’s (and iShares ETFs) acquisition of FutureAdvisor, the Invesco (which also owns PowerShares ETFs) acquisition of JemStep, and WisdomTree ETFs investing into AdvisorEngine.

In other words, as expense ratios on so many ETFs crash down to just basis points in the low single digits, the potential to sell managed models of those ETFs for a managed account fee of 10bps, 20bps, or 30bps, represents a substantial revenue expansion opportunity. Managed models that are “well-diversified” (i.e., not all in a <5 basis point S&P 500 index fund) also create the potential for asset managers to allocate at least a portion of client funds to less-commoditized and therefore higher-cost (and higher-revenue-generating) funds in their lineup that can generate more revenue. As a result, it’s no coincidence that TD Ameritrade announced that its initial models would be provided by a series of asset managers… likely to be comprised predominantly of ETF providers who will construct portfolios of their own ETFs (and either charge a management fee, or generate more expense-ratio revenue by allocating across a range of their ETFs with varying expense ratios).

Ultimately, though, the opportunity isn’t unique to just asset managers that produce investment products. Model Marketplaces create opportunities for any investment manager to distribute their investment strategies, including asset managers, specialized investment managers, and even other financial advisors. Because now, those who want to gather more assets into their investment strategies won’t need to build their own TAMP or outsourcing solution, or try to create their own ETF or mutual fund; instead, they’ll simply need to get their models into a Model Marketplace, and then try to get advisors to adopt the solution… without all the back-office hassle.

Envestnet And The Competition Of Model Marketplaces

Notably, the idea of being a platform that connects a wide array of third-party investment managers directly to financial advisors isn’t new – it’s one of the primary ways that Envestnet generates its revenue. As while most independent RIAs simply know of Envestnet as a provider of advisor technology – including Tamarac CRM and rebalancing software, FinanceLogix financial planning software, and more – Envestnet’s investment solutions, including PMC, its UMA solution, and fund strategist network, are an entire marketplace of third-party investment management for financial advisors.

However, Envestnet still functions primarily as an intermediary that connects and introduces financial advisors to various forms of TAMPs (often as SMAs), as well as its own (PMC) managed solutions, but not necessarily as a model marketplace that helps advisors implement those third-party investment solutions themselves. From this perspective, arguably the rise of the Model Marketplace is also a direct competitive challenge (and alternative solution) to Envestnet itself.

The question remains, though, as to where it is best to situate a Model Marketplace. It’s notable that the three initial providers so far have all built their Model Marketplaces into their rebalancing software – as it’s the rebalancing software that’s crucial to facilitate the implementation itself. However, Riskalyze’s Autopilot Partner Store is part of its “robo-advisor-for-advisors” solution and an extension of its risk tolerance assessment tools, while Orion Eclipse Communities is part of a portfolio accounting software solution, and the iRebal Model Marketplace is part of TD Ameritrade’s offering as an RIA custodian. Yet it’s unclear where advisors will actually want to engage in a model marketplace – through their robo tools, portfolio accounting software, or directly via their custodian?

In the meantime, it seems likely that other rebalancing software competitors will soon create their own competing Model Marketplaces. Notably, Envestnet itself owns Tamarac rebalancing software, and it’s not hard to imagine that it might soon begin to offer its existing third-party manager and strategist network directly as advisor-implemented models through Tamarac, rather than “just” via the managers directly. And with last year’s acquisition of Total Rebalance Expert (tRx) software by Morningstar, it wouldn’t be surprising to see Morningstar get into the Model Marketplace game soon as well, especially since Morningstar already has extensive capabilities for building and distributing investment management strategies and getting paid for investment models.

Perhaps the greatest competitive challenge of the new model marketplace, though, won’t be the competition amongst the marketplaces, but the newfound pressures they place on TAMPs themselves. After all, according to one recent study, the typical all-in cost of most TAMPs still varies from 0.75% to 1.5%, but it’s hard to imagine advisors and their clients tolerating such fees for “just” receiving models that they themselves implement, once the back-office implementation no longer falls to the TAMP provider. Clearly, the value of investment models and their underlying intellectual property is worth “something”. But once the back-office services are unbundled, the price point will almost certainly be much lower. And it will be up to advisors themselves to decide whether to also outsource the back-office duties and go “Full TAMP”, or simply to leverage the Model Marketplace and let the trading and rebalancing software make it “as easy as possible”.

The bottom line, though, is simply to recognize that the emergence of Model Marketplaces is a major shift in the landscape of investment management, with respect to both the distribution of both third-party investment managers, and the products that asset managers produce. In the process, Model Marketplaces will threaten both existing “marketplace” incumbents like Envestnet, and the current paradigm of third-party TAMPs. In the end, that doesn’t necessarily mean the existing solutions will go away altogether – as Envestnet still brings other capabilities to the table, and some advisors (particularly smaller independent advisors with limited staff resources) will still want to rely on “full TAMPs” to fully delegate their investment process and its implementation. Nonetheless, the rise of the Model Marketplace appears to represent one of the true disruptive threats of “robo-advisor” technology finally coming to bear.

So what do you think? Are Model Marketplaces here to stay? Would you consider using one as part of your investment process, in lieu of other alternatives like Envestnet or a TAMP? Please share your thoughts in the comments below!