It is popular these days to say that asset management has become commoditized. This suggests that a thorough due diligence process is no longer important, since asset managers are all essentially the same and their services are interchangeable. Nothing could be further from the truth as a quick review of the bottom-line categories of performance and pricing will reveal.
Beyond the 5 Ps, an advisor should also review the other services that the TAMP provides that benefit the client. These might include online account onboarding, performance reporting, billing services, an online client portal and client education materials.
There is nothing wrong with an advisor also benefiting from services provided by a TAMP if it is not at the expense of the client. But it is not acceptable for an advisor to send client assets to a TAMP with high fees and mediocre performance, so the advisor can gain access to cool technology, business-building marketing support and free conferences in exotic locations.
Nor is there anything wrong if a TAMP, an asset manager or a custodian gives away products or services along with its core offering. The problem only arises if an advisor decides to use that core offering in order to receive a benefit in the form of those giveaways and the advisor’s clients are disadvantaged in some way—such as paying more than necessary for the services they receive, or receiving services that are inferior to those that are otherwise available.
TAMP due diligence reviews should be performed on a regular basis, just as they would be on a mutual fund, an ETF or a separate account manager. “One and done” doesn’t satisfy an advisor’s duty of care. The process should be thorough, ongoing and focused on client benefits.
If a TAMP that originally satisfied reasonable due diligence criteria falls short in subsequent reviews, it is the advisor’s duty to move their clients’ assets to another TAMP that passes muster. Changing TAMPs is certainly more work than switching out mutual funds in a portfolio. But inconvenience to an advisor does not outweigh the advisor’s duties of care and loyalty.
Nor is it acceptable for an advisor to continue working with a sub-par TAMP simply because the advisor has developed a relationship with the firm and feels comfortable there. This certainly wouldn’t be an excuse for continuing to hold poor performing funds in a client’s account and it is not an excuse for sticking with a TAMP when better alternatives are available.
A practice is starting to grow in the TAMP world that is dangerous and could subject advisors to serious fiduciary liability. Some TAMPs are now quite openly offering “free” products and services to advisors who bring their clients’ assets to the TAMP. These services include website development, marketing support and compliance assistance. They are of little to no benefit to the clients whose assets are used to obtain them, but may be of great value to their advisors.
These TAMPs are, in effect, offering advisors something of value in return for their clients’ asset flow. It is no different than a mutual fund secretly giving kickbacks to advisors in return for their clients’ business. Advisors should steer clear of any TAMP that makes this kind of offer.
There is a danger that advisors who use TAMPs will come to look at them as service providers to their advisory firms rather than asset managers who serve their clients. This is a fiduciary trap that advisors should avoid at all costs. Hiring a TAMP is not the same as choosing a phone service or financial planning software provider. It is a fiduciary decision that should be approached with all the care and diligence of any other investment decision.
Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based TAMP that provides investment management services to financial advisors and their clients. He is an ambassador for the Institute for the Fiduciary Standard and a 40+ year veteran of the financial services industry. He spent the first 15 years of his career practicing securities and ERISA law in Washington, D.C. and started his career as an intern at the SEC. He can be reached at [email protected].