According to a study by Cerulli Associates published in late 2017, approximately 54% of CFPs (Certified Financial Planners) outsource portfolio management, and 46% keep it in-house.1
Advisors are using outsourced “strategist firms” for “asset allocation, portfolio construction, tax management, risk management and the active monitoring of investments for different types of portfolios,” and outsourcing has continued to increase in popularity, according to Envestnet.2
Michael Kitces said in February that TAMPs (Turnkey Asset Management Platforms) and outsourced investment management “are the future for most advisors. TAMP solutions were first launched in the 1980s to actually handle the process of managing a portfolio – making it as “turnkey” as possible – from selecting the initial stocks or mutual funds (or these days, ETFs) to then monitoring the portfolio and making investment changes (as necessary) on an ongoing basis.”3
Here are some of the advantages and disadvantages pointed out by financial industry insiders that you need to consider.
Advantages of Outsourcing
- If you’re a gregarious people-person, outsourcing the investment management part of your practice may free up more of your time which you can better spend engaging with clients, providing them with more attention to their overall financial planning services. You can just “manage the managers” on behalf of your clients to help ensure performance, and to make sure objectives are being met.
- Along with time, investment management comes with in-house costs to your practice in the form of back office operations, market and investment intel software, and investment management technology. It may not make sense to spend the money required for in-house investment management and the ongoing upgrades required, depending on your situation.
- By outsourcing investment management, you may be able to scale your practice, and make it easier to sell someday if that’s your goal.
- Outsourcing can eliminate any potential conflict of interest that may exist when your firm both creates financial plans and implements the investments. By outsourcing, a firm can “maintain a more objective posture in analyzing and critiquing client investment performance.”4
- Outsourcing can enhance credibility if your firm doesn’t have strong investment credentials on paper.4
- A study of 8,000 advisors by SEI Advisor Network and FP Transitions in 2016 concluded that, on average, outsourced investment management added $14.5 million and 14 new clients per year to the bottom line.5
“I outsource investment management, and I firmly believe that CFPs should not manage client portfolios,” said Wade Brittingham, CFP, of Voya Financial Advisors Inc. “I want to spend my time with clients adding value to their lives with my financial planning expertise.
“We have a fee-only, hourly/project based financial planning firm and choose not to manage client money,” said George Reilly, CFP, of Safe Harbor Financial Advisors…Portfolio management is not something we want to do. [We use] First Ascent Asset Management (FAAM) of Denver for that portfolio management. Clients engage separately with FAAM. We are the client-facing advisers, and they are, in effect, our back office,” Mr. Reilly said.”1
Disadvantages of Outsourcing
- If your passion is investing and you love the technical aspect of following the stock market, observing economic and investment trends, and making trades, you might not enjoy your job anymore if you choose to outsource. And if you’re really good at it, your clients might not benefit either.
- Outsourcing isn’t free, and not all providers are equal. Make sure you compare firms, so that their investment philosophies align with yours, and so that you understand and agree with their service and pricing model. Make sure they offer a full range of portfolios to meet your clients’ needs, and make sure that their minimum account sizes and limits match your firm’s. They must dovetail with what you provide, and provide efficiencies to you and your clients. “Fees among strategist portfolios vary along with their tax efficiency, which can both affect performance. After-tax, after-fee returns are extremely important.”2
- There can be a loss of control, depending on how the arrangement is structured. The third-party manager will “no longer have discretion over the portfolio or any of its trades; that power lies with the third-party strategist” in some cases. 2 However, according to Kitces, a “shift toward sub-advisor TAMPs in recent years is a key distinction, as the client is first and foremost a client of the advisor, and it’s the advisor who actually decides whether to keep or fire the TAMP as their sub-advisor.” Setting up a TAMP as a sub-advisor also allows you to claim the AUM.
“We don’t outsource our management,” said Evan Beach, a financial planner for Campbell Wealth Management. “We have a CFA in-house that does nothing but watch the markets and our portfolios. He is analytical, disciplined and experienced — not always the same things you want in a planner.
“Leon LaBrecque of LJPR Financial Advisors is more succinct: ‘We insource it. That is what we are paid to do.'”1
Is Outsourcing Right for You?
Outsourcing investment management is not right for every firm. Call Shurwest to discuss your practice, your goals, and whether or not outsourcing might be right for you: 800.440.1088.