The cost of outsourcing is a legitimate issue. Some outsourcing solutions are not worth the fees they charge. But there are some great alternatives that give good value for the fees charged. 

In a recent Northern Trust study, 53% of the advisors who made the transition to outsourcing said the transition had no impact on the fees their clients paid. So, outsourcing doesn’t necessarily mean higher fees for clients.

But the real issue is not what you pay; it’s what you get in return. If your clients get better investment outcomes and you have more time to serve your clients, then everyone wins. Focus on fees, but focus even more on the value clients receive.

Some advisors don’t outsource because they think their clients want them to do the investing themselves. In a 2019 study by TD Ameritrade on investment outsourcing, 71% of advisors said they believed that their clients prefer that they personally do the investment management.

However, the TD Ameritrade study found that 57% of clients had no preference about who performs the investment management “as long as my investments are secure and performance is satisfactory.” The study also found that 83% of clients who had 70% or more of their assets professionally managed had no preference regarding the advisor’s personal involvement.   

The reality is, most clients don’t work with their advisors because they believe they are gifted asset managers. Instead, they value the relationship with someone who knows their goals and objectives, helps them with financial planning and coaches them through difficult times.

The facts show that the transition to outsourcing is rarely an issue for clients, and their satisfaction levels after the transition are consistently high. Remember, 92% of advisors said their clients reacted positively when they made the transition to outsourcing and 80% said they went through the transition without losing any clients or revenue.    

If you like to customize each client’s portfolio, outsourcing is probably not for you. But TAMPs can often handle special situations that require some level of customization to deal with unique client situations. Check with any TAMPs you are considering to determine their capabilities. 

If you really want to keep your hands on the steering wheel, you should consider options like model marketplaces or an OCIO relationship where you can adjust portfolios when you want.        

How To Explain The Change
One question that often comes up when advisors are deciding about outsourcing is how to explain the change to clients. This usually turns out to be easier than advisors think it will be.

Northern Trust research suggests that over 90% of advisors use one of four basic approaches. 

The first focuses on increased advisor attention and professional asset management:   
“Outsourcing enables me to devote more of my time and expertise to focusing on your needs. We are using expert specialists to manage your money under our supervision.”

The second approach focuses on objectivity and better alignment of interests:
“In our effort to make certain that your money works as hard as it can for you, we’ll be in a position to hire some of the best money managers and replace them if we ever need to.”

The third approach focuses on service enhancement:
“We will be able to offer you the same level of services and technology capability as the very largest firms offer.”

The fourth approach focuses on cost reduction:
“Outsourcing enables us to do more with fewer in-house resources and we can pass the savings onto our clients.”

Final Thought
Deciding whether to outsource your investment management is a highly personal decision. Just because the world is trending toward outsourcing doesn’t make it right for you.

There are certainly many benefits that outsourcing can bring, but you should make the decision based on what’s best for you, your clients and your firm.

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 has served as president or CEO of five TAMPs over the course of the past 30 years. He is a 40+ year veteran of the financial services industry. He can be reached at [email protected].

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