Offering in-house investment products along side out-of-house ones, especially at different prices, reeks of conflict. By having in-house products, are you pushing the client to choose the internal option? Is the internal option more profitable to you? Can a client drop one in-house product without impacting another?
Assume that you have chosen the fully outsourced manager of managers model to eliminate some of the questions we just discussed. How can an investor gain confidence that the manager of managers model is conflict free? The key is to maintain arm's length and transparent relationships with the investment managers you choose for your clients.
This means that there can be no financial benefits to the manager or your firm should assets go to a particular manager. This also means there can be no fee sharing, rebates or other payments of any kind between you and the manager. You need to live this model without exceptions and also fully disclose the nature of your manager relationships to your clients.
What about avoiding any perceived conflicts that might exist? This is more about making the investor more comfortable with your firm. The first thing to do is give clients an array of choices. It should be expected that you will provide the pros and cons of the options and even recommend one option over another, but in the end, the investor must have several choices. The lack of choices might plant that seed in the client's head: Why do they want me to go with this manager? Do they have some "special" relationship with them? Giving choices with the pros and cons of each helps ease client concerns in this area.
Once they have choices, it is also recommended to have the client involved in all investment decisions. This invests them in the process. They cannot come back and question your intentions. Having the client maintain discretion over decisions also creates an opportunity for a continuing dialogue with your client. More dialogue makes for a much better long-term relationship.
Another method the advisor can use to give the client more comfort with your firm is to align interests between the firm and the client. A few methods of achieving this alignment are recommended. If you "eat your own cooking," investing any of your family or firm assets with the same managers, interests become aligned. Clients respond extremely favorably to this approach. Another more common method advisors use is to charge asset-based fees for services so that both the client and the advisor share in the success or failure of the investment program.
The last key strategy to giving the client comfort that hidden conflicts do not exist is to clearly communicate your business model. Clearly disclose what services you outsource and to whom, detailing how you work with outside firms, upfront, as part of the prospecting process. This creates a wonderful environment of trust at the start of a relationship, allowing the relationship to build from there, unfettered by lingering client questions.
Conclusion
The decision on what to outsource is complicated and there is no one right answer. Looking at the market place you see a variety of combinations of outsourced and in-house service models, each bringing a slightly different solution to the client. This is wonderful for advisors and MFOs because they can develop a business model delivering the type of service they want that best complements their core competencies. Mostly it is wonderful for clients because they have choices. Ultimately, clients will decide which model is best for them.
Jeffrey A. Hollowniczky, CPA, is chief administrative officer for Ashbridge Investment Management in Philadelphia.