Outsourced Investment Management: the Future for Most Advisors
For those who aren’t familiar, TAMPs originated nearly 30 years ago, with early leaders like PMC, AssetMark, Lockwood, Brinker Capital, and SEI. The idea of the TAMP was that they would handle the process of actually managing a portfolio – making it as “turnkey” as possible – from selecting the initial stocks or mutual funds (or these days, ETFs) to then monitoring the portfolio and making investment changes (as necessary) on an ongoing basis. As a result, the TAMP structure made the investment management process much easier for advisors, allowing advisors to have consistently managed portfolios, and refocus their efforts that would have gone towards managing investments towards better servicing clients (or finding new ones).
While in the past TAMPs were primarily the domain of asset-gatherers (who freed up their time to get more clients into the TAMP), they can make a lot of sense as a means to stay involved in the investment process, but not have to be that hands-on with the portfolio (or feel compelled to hire a CFA to run the portfolios). As a result, we’ve seen the rise of some “simpler” TAMPs that focus on ETF or DFA-oriented mostly-passive portfolios, relying on their service and technology as a differentiator, rather than their investment results. Thus, while TAMPs have historically charged as much as 75 basis points or even a full 1% for their services, the next generation of more passively-oriented TAMPs are coming in at 50 basis points, 40 basis points, or some even at 30 basis points for larger RIAs (depending on both the size of the advisory firm, and also how much back office and other support the TAMP actually commits to provide).
Yet the addition of a new layer of TAMP costs raises another important question: who should pay for it? Or put another way, how should advisors set their fees around the TAMP? Ultimately, there’s not necessarily a “right” or “wrong” answer here, because the truth is that it depends on how the advisor was positioned with its clients in the first place. If the advisor’s value to clients was helping them to find a good investment solution, the advisor may be able to still justify his/her fee for selection, due diligence, and monitoring, and the client would pay the TAMP fee for what the TAMP does. But if the advisor’s value to clients was “managing their money”, and then the advisor outsources it, it’s a little more awkward, as arguably now that should be advisor’s cost, not the client’s, because the client is already paying the advisor to do it. At the same time, it’s important to remember that according to the latest benchmarking data on advisory fees, the typical advisor is charging 1% on a portfolio up to $1M in addition to the underlying costs that average 65 to 85 basis points (with higher costs for smaller portfolios). Which means advisors who charge 1% for the first $1 million dollars, and use a TAMP that charges less than 50 basis points and has low-cost ETFs inside, will have total costs that are still below the median all-in cost for advisors today!
Enjoy the great video on below the subject from Michael Kitces;
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