Why TAMPs And Outsourced Investment Management Are The Future For Most Advisors

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

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#OfficeHours with @MichaelKitces Video Transcript

Welcome, everyone! Welcome to Office Hours with Michael Kitces.

For today's Office Hours, I want to talk about the idea of outsourcing investment management, which a recent Cerulli study found is now increasingly popular, especially among CFP certificants. And in fact, as advisors increasingly focus more on giving financial planning advice, I think ultimately it's going to become an industry standard in the future for virtually all CFP professionals to end out using some combination of TAMPs and technology tools to either outright outsource their investment management or at least grossly minimize the time that they spend implementing portfolio management for their clients. In other words, notwithstanding their recent growth, I think TAMPs are about to get a whole lot bigger than they actually are today.

What Is A TAMP (Turnkey Asset Management Platform)? [Time - 0:58]

For those who aren't familiar, TAMP is an acronym. It stands for turnkey asset management platform. They originated almost 30 years ago with early companies like PMC (which is now part of Envestnet), AssetMark, Lockwood, Brinker Capital, and SEI. The idea of the TAMP was that they would handle the process of actually managing the portfolio, from selecting what back then would have typically been initial stocks or mutual funds, these days maybe ETFs, and then monitoring and making changes to the portfolio on an ongoing basis.

So at the time they originated, they were basically an alternative to the advisor personally taking the time to pick one individual stock at a time or identify individual mutual funds for their clients. Instead, you could outsource to a TAMP, who would then implement a more holistic investment strategy for the clients and buy whatever stocks, bonds, mutual funds etc. were needed.

So clients often felt like they got a more personalized portfolio that was really being managed for them, particularly because 20 or 30 years ago, most advisors didn't have the time to manage portfolios hands-on, they didn't have a team to manage portfolios hands-on, didn't have any technology to handle portfolios hands-on.

Typically, we would just kind of sell whatever funds were popular and doing well at the time, and then maybe when clients sat down for an annual review, we would pull some fresh Morningstar reports and do a little due diligence and say, "Okay, this one actually isn't doing very well, let's implement this new fund instead," which meant over time, every client's portfolio was kind of a different jumbled combination of stocks and bonds and funds that had been purchased over time.

The TAMP structure made this much easier for advisors so that all of your clients would have a consistent investment portfolio that the TAMP managed. And because it saved time to not need to do all that investment analysis and research, because you handed all the portfolio management duties off to a third party, your role as the advisor was to pick the TAMP manager and the strategy that your client would get invested in, and then go find more clients that wanted to invest into it.

And that process of doing manager and strategy selection and the due diligence... that was the value-add of the advisor in the process, rather than analyzing and picking each stock and bond and mutual fund. And because TAMPs could get larger with scale as they grew assets with their own standardized investment strategy and process eventually helped to bring the costs down, at least compared to what actively-managed mutual funds tended to cost at the time.

Third Party Asset Manager (TPAM) vs Sub-Advisor Arrangements [Time - 3:20]

In the early days of TAMPs, most of them were structured as what were called third-party asset managers. You still may sometimes hear the acronym T-P-A-M for short. Now, I know this is a little bit confusing. A T-P-A-M was a TAMP or a T-A-M-P, so a third-party asset manager was a subset of the TAMP category. And the key aspect with the third-party manager was that the client technically contracted directly with the TAMP for their portfolio, did the paperwork with the provider, and the advisor was essentially just assigned to be a rep on the account or may have been paid as a commission trail on the account for selling it.

So in the early days, most of those turnkey asset management platforms were actually distributed through broker-dealers and were popular as a solution for brokers who were especially good at just gathering assets into investment strategies and didn't want to take the time to do the picking of the stocks and the funds. But again, technically, the primary relationship was between the client and the third-party asset manager that was serving as a turnkey asset management platform. The broker that helped to service the client was compensated for doing so usually through the broker-dealer.

By contrast, though, in the RIA community today, it's actually more common to use a sub-advisor version of a TAMP relationship. So as a sub-advisor, the clients actually contracts directly with the RIA using their investment management agreement. So as the advisor, the client signs with me, I then acknowledge that a TAMP is my sub-advisor, and then I as the advisor in my RIA contract with the TAMP to sub-advise my client's account. In a lot of cases these days, it's done directly through the RIA's custodian. So the client technically signs a limited power of attorney (an LPOA authorization) to grant the TAMP the right to make the trades in their account on the custodial platform. Although with a few of the larger TAMPs, they actually have their own custody and clearing agreement, so the LPOA may get signed between the TAMP as the manager and the TAMP as the custodian to sort of trade in their own account.

But the key distinction is that, with a sub-advisor relationship, the client is first and foremost the client of the advisor and is the advisor who decides whether to keep or fire the TAMP as their sub-advisor, which also actually means the RIA then can legally claim the assets of the client portfolios as their own regulatory AUM because the advisor, the RIA is the one actually responsible for the primary management, even if their management process is then selecting a third-party manager for implementation.

Now, there are some other TAMPs that still operate more as third-party asset managers and may pay RIAs a solicitor fee for bringing them business rather than sub-advising, kind of akin to the old brokers trail commission arrangement, but most of the RIAs I'm seeing these days structure their TAMP arrangements as sub-advisors instead, especially with independent RIAs that provide TAMP services to other RIAs. So this is how we actually structured it for our own TAMP for other RIAs at Pinnacle, recognizing that most other RIAs, you know, we all like to control our own client relationships and control which TAMPs they do or don't do business with. So our TAMP sub-advises to other RIAs for their clients, which is how we're seeing more and more RIAs do it these days.

The Rise of Fee-For-Service Financial Planning and the Rise Of The TAMP [Time - 6:32]

Historically, TAMPs were more popular in broker-dealer platforms, either for those who were especially good at business development and asset gathering but didn't want to be doing all the investment management analysis so they outsourced it or for those who just thought that some TAMP strategies were especially compelling. They would sell it to their clients as basically a more individualized, customized, personalized, separately managed account strategy than just buying some mutual funds or stocks.

But in recent years, a new kind of TAMP adopter has emerged, the holistic financial planner. These are the advisors who are paid heavily or primarily for their financial planning services rather than being paid for their clients to just do the investment stuff. They are typically RIAs and not under a broker-dealer, because you have to be an RIA to charge an advice fee, and they might be charging an AUM fee on the portfolio but they build their value proposition, not around just picking and managing investments, but all the financial planning advice. And in some cases they literally don't even charge for assets, they just charge financial planning fees, which not coincidentally that growth in fee-for-service planners is why we recently launched our AdvicePay platform.

But from the TAMP perspective, the key point is that RIA financial planners are often advisors who do still want to be certain clients get properly invested. They want to play at least some role in the investment or manager selection and monitoring process but aren't trying to create their value by making better portfolios and don't want to be that hands-on in the portfolio and don't want to hire a CFA to internally run and manage their portfolios. So they need an outsourced investment management solution, a TAMP, and often a relatively simple TAMP. Because when your value isn't about trying to bring output to the table, you don't necessarily want or need a more complex investment management solution, just something that gets clients reasonably implemented into a diversified portfolio with low-cost funds.

And so in this context, we've seen the rise of larger, more passively-oriented TAMP platforms, you know, DFA-oriented shops like Loring Ward and BAM Alliance. We built our own XY Investment Solutions TAMP for XY Planning Network members specifically to be comprised entirely of low-cost index ETFs and DFA funds for the same reason. And these TAMPs actually are ending out being simpler and often cheaper than other TAMPs, which historically were charging as much as 75 basis points or more. Next generation of TAMPs that we see for financial planning-oriented advisors, we're seeing at 50 basis points, 40 basis points, some even 30 basis points for larger RIAs because you get breakpoints at larger sizes.

How Much Do TAMPs Cost And What Do Advisors Charge? [Time - 9:09]

And these costs for TAMPs are important because ultimately, it is an extra layer of cost for the end client, right? Because the advisor gets paid, then the TAMP gets paid, and then if they're not investing directly into stocks and bonds, the underlying funds still get paid as well, right? The mutual fund or the ETF expense ratio is a third layer of cost here. Now again, as TAMPs grow, especially in the RIA space, costs do seem to be coming down. What was 75 basis points or more in the past, I see more commonly as 30 to 50 basis points now, with maybe a little bit of variability based on how much service the TAMP provides. In the world of third-party asset managers, they often did everything and just remitted a fee to the broker.

Sub-advisor relationships, though, if the RIA retains more control, they also have more responsibility, and usually the direct primary relationship with the custodian. So some sub-advisor TAMPs for RIAs just manage the money. They set the models, they do the trading or rebalancing but that's it. It's up to the advisor to onboard clients, free up cash if the client needs a distribution, handle their own billing. Other sub-advisor TAMPs or RIAs do more of the back-office functions as well. It might be a little more expensive since they're adding an extra layer of service, or some even charge separately for the service layer and you buy up if you want those back-office options.

All of which raises what's actually one of the most common questions I hear from advisors that are looking for TAMPs, which is, how do you set your fees around the TAMP? This was actually a discussion we had recently on the XYPN Radio podcast as well. Because after all, you could just charge your client a single advisory fee and then pay the TAMP out of your fees, you could charge two separate layers of fees, right? Your fee for your role and then the TAMP fee for the TAMP's role, it might have add up to the same thing but they're billed separately, and some advisors will then reduce their fees in recognition of the work that the TAMP is doing. Others tend to keep charging their own fee and just let the TAMP charge its own fee. You know, kind of akin to a mutual fund manager charges a management fee for buying the stocks and bonds while the advisor would get paid for selecting the mutual fund, you know, or the ETF manager gets paid to actually put together the ETF and the stocks, but the advisor gets paid to select the ETF. Now, the good news is the typical cost for TAMPs these days is less than the cost of a lot of mutual fund managers, and then the advisor gets paid for the selection process.

Ultimately I have to admit, I'm not sure there's a right or wrong answer here about the best or most proper way to get paid for a TAMP, because the truth is that it really depends on how the advisor was positioned with their clients in the first place. You know, if your value for clients was helping them to find a good investment solution and you used to pick, you know, mutual funds for them, now you're picking TAMPs, it's just from picking one type of manager to another type of manager, you can still justify your fee for selection, due diligence and monitoring, you don't necessarily have to change anything.

If your value to clients was, you manage their money and then you outsource it and don't manage it, now it's a little bit more awkward. If the client expected you to be the portfolio manager, you would have either had to hire a CFA and staff or you're outsourcing to a TAMP, but arguably now that should be your cost, not your clients because the client was paying you to do it and you're delegating it down.

Now, if your value to your clients is primarily the financial planning and that's what they're paying for, arguably once again, you should be able to continue charging what you're charging for the value you're delivering and let the client pay for the TAMP. You know, maybe you'll charge some AUM fee since you're still responsible for selection, due diligence, and monitoring of the TAMP, but if most of what you get paid is for financial planning and you're still doing the financial planning, there's no reason you need to cut out your fee to pay the TAMP any more than you give advice for estate planning but you don't pay the client's lawyer, and you might give advice on tax planning but you don't pay the client's CPA. You can give advice around investment portfolios, you don't need to pay the client's TAMP fee if they're already paying you or they're separately paying you for the advice.

And at the same time, it is important to remember that according to latest industry benchmarking data on advisory fees, the typical advisor is charging 1% on a portfolio up to $1 million in addition to the underlying costs, which average about 65 to 85 basis points, depending on size of portfolio. You know, higher costs for small portfolios, slightly lower costs for larger portfolios. So frankly, if you charge 1% for up to the first $1 million and then use a TAMP that charges less than 50 basis points with a bunch of low-cost ETFs inside, you are already lower than the median cost of advisors today.

And I think that's important because I see a lot of advisors putting huge pressure on themselves to cut their 1% AUM fee when they use a TAMP, not realizing that their fee plus a low-cost TAMP is already below the average all-in fee. Now, that may change at some point as firms get more efficient and costs continue to come down, but it doesn't mean you have to reduce your fees just to be price-competitive and win the business today, at least not unless you're working with much more affluent clients who may demand lower fees. But that's why most of us already have graduated fee schedules with lower fees as the assets rise.

The key point to all of this, though, is just to recognize that as financial advisors, as we increasingly focus on financial planning and investment management kind of literally becomes less central to our value proposition with clients, it becomes less central to what we actually do in our businesses, which I think is going to continue to lead to this ongoing rise of TAMPs and outsourced investment management solutions. The recent Cerulli study actually found the majority of CFP professionals, 54%, are already outsourcing portfolio management. And I think the better we get at delivering value with financial planning, the more we will outsource the investments.

Now, it's ironic because I know some have been predicting that the value of investment management services is going to zero, that TAMPs are going to go away, but the reality is that client's money still has to be invested somewhere. That won't change. They have money, and it needs to get to the capital markets. The less the financial planner focuses on investments, the more relevant outsourced investment management solutions become as a way to implement this, albeit perhaps at a lower cost as they get bigger with more scale.

And, you know, new innovations I think will continue to mix this up as well. Things like the rise of model marketplaces, where the third-party manager gives you the model but you use the rebalancing software to implement it yourself. So if you're an RIA that wants to retain a little more control and not be solely responsible for building and managing the model but want to simplify it, that makes it a little bit easier with the model marketplace, which will put I think more pressure on TAMPs to be more about the service and the back-office assistance and not just the investment models themselves, just as we as advisors are focusing more on financial planning and not so much on the investment management and the models themselves.

In any event, though, I hope this is some food for thought around the rising trend of TAMPs, why I think financial planners are more likely to use TAMPs as part of their value proposition, and where a TAMP fits into the picture for what financial advisors do and how they charge for their services.

This is Office Hours with Michael Kitces. We're normally 1 p.m. East Coast time on Tuesdays. Obviously, we're here on Wednesday today because I had some meeting conflicts yesterday, but thanks for joining us, everyone, and have a great day.

So what do you think? Have you used a TAMP? Have you thought about outsourcing your investment management? What types of services would you like to see TAMPs provide going forward? Please share your thoughts in the comments below!