As competition heats up, everyone is looking for an edge. Some advisors try to gain an edge by outsourcing their investment management to a turn-key asset management provider (TAMP) or third-party fund strategist. But outsourcing is not right for everyone.
This article will help you determine if outsourcing might provide benefits to your firm. It will also explore the different outsourcing business models that are available, how to pick the right outsourcing partner and how to explain outsourcing to your clients.
Setting The Stage
The outsourcing business for independent advisors started a little over 30 years ago.
Based on studies by Cerulli, Northern Trust and TD Ameritrade, it appears that, today, about half of all advisors are outsourcing some or all of their investment management.
Tiburon Strategic Advisors estimates that at least $2.2 trillion in assets is being managed by TAMPs or fund strategists.
Advisors who decide to outsource have a very high level of satisfaction with their decision. Recent studies by Northern Trust and AssetMark show:
• 97% of advisors are satisfied with their decision to outsource.
• 98% say they deliver better investment solutions after deciding to outsource.
• 80% of advisors say they lost no clients or revenues when they made the transition.
• 70% said they grew their client base and/or revenues as a result of outsourcing.
• 86% said outsourcing made them more successful.
• 87% said outsourcing met or exceeded their expectations.
Their clients also have a very high level of satisfaction with the services they receive. Ninety-two percent of advisors say their clients reacted positively to the transition to outsourcing.
Are You A Good Candidate?
Just because there are a lot of satisfied advisors who outsource doesn’t mean it’s right for you. You can determine if you’re a good candidate by asking yourself four questions.
First, what’s your passion? If you became an advisor because you love investing, why would you give up doing something that brings you joy? If you became an advisor because you love helping and interacting with clients, outsourcing could help you do more of what you love.
The next question to ask yourself is: “Am I good at investing?” If you love investing, but have no particular skill in that area, maybe you should consider outsourcing to a specialist?
Or you may have skill in certain areas, but not in others. For example, you may be particularly good at researching and investing in alternative investments, but have no interest or skill in managing a client’s core portfolio. Maybe outsourcing the core portfolio management, but continuing to focus on managing alternatives for your clients is a good solution?
The third question to ask yourself is: “Will I be able to give up control?” You are inevitably giving up some element of control when you outsource. There will be limits on how much you can be involved in portfolio management decisions. In most cases, you will have little input.
Make sure you will be OK with delegating these important investment responsibilities. If not, you’re probably not a good candidate for outsourcing.
The last question to ask yourself is: “What are my firm’s goals?” Even advisors who are passionate about investing and are good at it may have overriding goals that make outsourcing a good alternative for them.
What Are The Benefits?
Why do firms outsource in the first place? What are they trying to accomplish and what benefits do they get?
The first answer to this question is usually “time.” Outsourcing provides advisors the opportunity to gain back a significant amount of time in their workweek.
A recent Northern Trust study suggests the average advisor spends about 28 hours per week on investment management. Other studies by Cerulli and TD Ameritrade suggest that the number may be around 40% of an average work week.
How much time could you get back if you outsourced and how would you spend it? Most advisors who outsource say they use the time to prospect for or serve existing clients. But some use it to pursue what they perceive as higher value activities like financial planning.