Building and growing an independent RIA or IAR firm is no small task. If you’re reading this, you’re likely feeling the pressures of operating with limited resources in terms of capital and manpower. You’re eager to generate more growth, but the more the firm grows, the more you realize the complexities of producing competitive returns for clients.
You have a clear choice to make. Either continue your day-to-day operations or outsource your investment research and money management to free up more time for marketing and serving current clients. Outsourcing investment management may be your best choice if you want to simplify and streamline your operations.
But herein lies a critical question: Do you outsource to a TAMP (Turnkey Asset Management Program) or an OCIO (Outsourced Chief Investment Officer)?
In this digital age, making the right decision can be the difference between accelerating your firm’s growth and staying stuck where you are now. As we dive deeper into this topic, we’ll describe the key differences between TAMPs and OCIOs, weigh their pros and cons, and ultimately help you determine which alternative aligns best with your firm’s unique needs.
Before diving into the specifics of TAMPs and OCIOs, it’s essential to pinpoint your investment management outsourcing needs. Remember, not every solution fits every firm. Begin by evaluating your firm’s current strengths and opportunities for improvement.
Would you and your clients be better off outsourcing investment management to a third party? Would your firm be more marketable if you were the money manager? What is the best solution if you decide to outsource money management?
One mistake many firms make is jumping into a solution without clearly understanding their unique needs and challenges. You may be looking for a comprehensive turnkey solution or a helping hand in research and analysis. By defining your needs, you’ll be better positioned to choose between the various outsourcing options available to financial advisors.
OCIO, or Outsourced Chief Investment Officer (OCIO), is a third party that can manage your clients’ assets for your firm.
These highly skilled, credentialed professionals can be responsible for crafting, revising, and implementing your investment management strategies for your clients. Hiring an OCIO can be akin to establishing a money management team at your firm. They can bring focus, expertise, technology, and services beyond the scope of the services that smaller RIAs might provide.
Leveraging the knowledge and services of a CIO gives you and your team more time to focus on nurturing existing client relationships, financial planning, and other core services.
Benefits of Using an OCIO
While there are many benefits of working with an OCIO, here are five of the most frequent benefits that RIAs and IARs experience when partnering with an OCIO:
- Hiring an OCIO means you have access to a team of professionals with specialized expertise in investment management. They can provide research and portfolio management services that potentially can produce competitive rates of return for your clients.
- Managing investments in-house with full-time employees can be expensive. By outsourcing to a Fractional CIO you can keep costs down while providing a higher level of service to your clients.
- OCIOs can make your firm more marketable when investors know you have a dedicated resource managing their assets. Your firm is also more competitive against bigger firms that employ full-time CIOs.
- OCIOs can provide sophisticated risk management services. Whether it is diversification or securities selection, they can identify, monitor, and minimize investment risks more effectively due to their deep industry knowledge, experience, and dedicated resources.
- An OCIO can offer tailored investment solutions based on the unique needs and objectives of your firm’s ideal types of clients. Whether it’s about achieving specific returns, maintaining liquidity, or any other goal, an OCIO can craft a bespoke strategy.
- Outsourcing investment research and management can help you focus your time and resources on your primary mission and core competencies, such as adding new clients and serving current ones.
Additional OCIO Considerations
It’s important to go into a partnership with an OCIO with a full understanding of how the relationship will work. Who is responsible for what? As with any relationship between two professionals, there can be certain tradeoffs that should be considered.
- Outsourcing the CIO role can mean giving up some control over the investment decision-making. However, giving up some control is how you free up time for tasks only you can do.
- Similar to TAMPs, OCIOs can come with additional fees or revenue sharing. However, OCIO asset management may potentially offset additional fees with improved performance.
- An OCIO’s approach might not always align perfectly with a firm’s current philosophy or client expectations. This is an important topic of discussion before you select an OCIO service.
- You will need a clear understanding of the OCIO’s investment philosophy and practices to create realistic expectations for clients.
- Engaging an OCIO may involve a long-term service agreement, which may be a problem if your firm decides to switch providers or bring the function back in-house at some point in time.
TAMP stands for Turnkey Asset Management Platform. It provides financial advisor firms with comprehensive investment services, including portfolio management, administrative support, and client reporting.
Think of TAMPs as an all-in-one solution for advisors who wish to outsource their investment management responsibilities to a vetted third party.
TAMPs allow firms to access high-quality investment strategies, technology, and other resources without paying substantial upfront and recurring expenses. High-quality, full-time investment professionals can be very expensive.
Here are five reasons advisory firms consider using a TAMP:
- TAMPs are typically designed as plug-and-play solutions for advisors. They streamline the process by providing pre-built portfolios, research, and operational support, allowing advisors to integrate these platforms effortlessly into their existing infrastructure.
- One of the standout benefits of TAMPs is their scalability. As your advisory firm grows, the TAMP grows with you, making accommodating an increasing number of clients easier without compromising service quality.
- Due to their standardized nature, TAMPs can often offer cost efficiencies, especially for advisory firms that don’t have the scale to negotiate better terms on their own. This can result in cost savings passed onto money management clients.
- TAMPs usually come with a specialized focus on asset management. They have many resources, from research teams to technology tools, designed specifically for investment management. This can lead to better outcomes for clients seeking a dedicated asset management solution.
- For advisors seeking simplicity, TAMPs provide a standardized approach to asset management. This can lead to more consistent results and a more straightforward client experience.
Drawbacks of Using a TAMP
Entering into a partnership with a TAMP requires a clear grasp of the dynamics involved. Like any relationship, weighing the pros and cons is essential.
- TAMPs often provide standardized portfolio solutions. While this can be efficient for some advisory firms, others might find the solutions too cookie-cutter and not tailored to specific client needs.
- Some TAMPs have fee structures that can be expensive, especially when adding them to the underlying financial advisor fees. This can eat into a client’s returns over time.
- While TAMPs generally offer a broad range of investment choices, they might not cover niche or specialized strategies that you are seeking.
- Using a TAMP service may require changes in your current business practices, including changing custodians, which can be disruptive and time-consuming.
- Some TAMPs might have affiliations or incentives tied to specific products or solutions, which can raise questions about objectivity.
While both OCIOs and TAMPs aim to help financial advisory firms with professional investment management, there is one major difference that impacts the way the two services are presented to potential clients.
An OCIO is more of an internal solution. That is, an OCIO makes the financial advisor a money manager who is making all of the key investment decisions on behalf of clients. This makes it much easier to rationalize the fees that the advisor is charging. Investment management is an internal service and not an outsourced service.
On the other hand, TAMPs make financial advisors asset gatherers. The advisors are turning a client’s assets over to third parties for investment management. Then the TAMP plugs the advisor’s clients into the models that are pre-selected by the advisors.
Both models provide scalability, expertise, and the potential for improved efficiencies. Your choice may boil down to the choice: Money manager or asset gatherer?
Outsourcing investment research to an OCIO can be a game-changer. Research is time-intensive, requires specialized expertise, and is crucial to the success of your investment strategies. With its dedicated resources and specialized professionals, an OCIO can offer in-depth, up-to-date, and objective research.
However, this isn’t a one-size-fits-all answer. If your firm already has a robust research department or believes in retaining this function in-house for strategic reasons, outsourcing might not be your best bet. Consider the cost, efficiency, and quality trade-offs before deciding if it makes sense to outsource your investment research.
Once you’ve made the decision to outsource with an OCIO, you want the transition process to be smooth, not only for your internal team but more importantly, for your clients.
It should start with clear communication so both parties have realistic expectations. Make sure your team and clients understand the reasons behind the change and its potential benefits.
Next, work closely with the OCIO during the initial phases. Discuss your firm’s investment philosophy, objectives, and any specific requirements. Remember, a successful partnership is built on trust and understanding.
Lastly, monitor the transition. Require regularly scheduled performance reviews, solicit feedback from your team, and ensure that the OCIO aligns with your firm’s goals and values. Adjustments are inevitable, but with open communication and a shared vision, the partnership will thrive.
A successful transition will make your firm more marketable and increase your client retention rate at the same time.
To learn more about our customized OCIO services, connect today.
Cornerstone Portfolio Research (“Cornerstone”) is an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. This publication should not be construed by any consumer or prospective client as Cornerstone’s solicitation or attempt to effect transactions in securities, or the rendering of personalized investment advice over the Internet.
The statements in this publication are the opinion of Cornerstone regarding Outsourced Chief Investment Officer (“OCIO”) services. These are not personalized recommendations and you should consider your own criteria when choosing an OCIO.
A copy of Cornerstone’s current written disclosure statement as set forth on Form ADV, discussing Cornerstone’s business operations, services, and fees is available from Cornerstone upon written request. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Cornerstone or the professional advisors of your choosing.