"Make sure the fee structure is competitive," says Carstens. If the platform fee is competitive, it makes it easier for the advisor's fee also to be competitive. However fees are structured, Carstens adds, they need to be consistent across the client base. Miller recommends unbundling fees and only using one custodian. "The best thing you can do is align yourself with a broker-dealer who can custody and pretty much do business with anybody," he explains. "Find a custody partner that is very flexible and competitive. I would want the manager's fee, the trading (and I wouldn't get paid on that) and the consulting fee all to be separate."
What if you make the wrong decision? "People make wrong decisions in life, and you just have to be a grown-up and be willing to start over," says Carstens. Even so, little that would be involved in such a realization would affect clients. "Primarily, it affects how you run your business."
Finding The Best Managers
Finding smaller, niche managers as Miller suggests can be difficult, but it's doable. As he mentioned, the managers should have the majority of their personal assets invested in the portfolios they manage. "They also should be less focused on style-box purity. I think that's overdone. If they've got more flexibility, they'll be more focused on research and not staying within a style box. I would only do business with a manager who does his own research and goes on-site at companies in the portfolio," he explains.
By researching small managers, advisors can develop a niche to their business that they can take into the marketplace, says Miller. "We think that advisors would have a much more compelling value proposition if they could build their practices around identifying and monitoring the 'undiscovered' managers that are in the earlier stages of their life cycles as firms. Advisors must match this service with the research that proves the merits of catching these managers early. I feel sure that it would be easy to illustrate how managers' performance deteriorates after they enter the broker wrap programs," he says.
Most experienced advisors have a network of colleagues through which they can discover quality niche managers. Sometimes, clients also will ask advisors to research managers that they or their friends and business associates have used. Some platforms such as Brinker Capital also will have a few managers not commonly offered by other platforms, in order to differentiate themselves.
According to these criteria, with larger managers the platform is the most important decision. Two of the advisors interviewed felt that using large managers was not advisable because so many are chasing benchmark-type returns that they change their style to match the index they are targeting. In such an instance, passive management may be a good alternative and will provide lower fees.
Time Wasters-What Not To Do
Due diligence on managers can be leveraged according to the quality of the platform's research. "Any time a new manager is added, I still find a way to have them come in or do a conference call just to kick the tires myself," says Carstens. But being able to leverage off of a platform's due diligence saves valuable time that could be spent building business or servicing clients.
Many advisors looking to incorporate separate accounts want to lay all of a platform's managers side by side and compare performance. "That's the worst place to start," says Carstens. "There's a lot of manager overlap among platforms, number one, and number two, you can't really tell what's going on by just looking at the numbers."
And again, don't start with more than one platform. Starting out with only one allows an advisor to test the service quality, since larger assets open the door to greater access to, and attention from, the platform's support team.
Transitioning Clients And Other Tips
The most important aspect of preparing clients for the change is in letting them know what to expect. "Let them know the differences in fees, the way decisions will be made," says Carstens. "Identify the advantages and let them know what it's going to look like for them." Also, explain that clients will see all the trades being made and that no one will be calling them to do a trade. "These managers are in the trenches every day-they're far smarter than you or I will ever be, so we want to give them full discretion," is an example of what to tell clients.