Successful investment advisors can be faced with two major decisions that will have a major impact on the future of their businesses. First, who makes investment decisions for their clients’ assets. And second, how do they allocate their time to maximize the growth and profitability of their firms. Conversely, how would their clients be better off? Are they better off if the financial advisor manages their assets or would an Outsourced Chief Investment Officer (CIO) produce better results for their portfolios?
These are pivotal decisions when advisors struggle to keep up with the day-to-day demands on their time and resources. The needs of current clients should supersede the needs of potential clients. This makes sense since current clients produce revenue and potential clients do not – a least not yet. However, the potential outcome for this decision is grindingly slow growth.
How do you coordinate the need to produce new clients and the need to meet the expectations of current clients? One answer is to outsource some of the work in a way that benefits your clients and your firm. We believe there are 12 compelling reasons why you should consider using an CIO model. An outsourced investment manager can take on the burden of managing your clients’ assets.
Reason #1: What is the highest and best use of your time?
It stands to reason the highest and best use of your time is talking to prospective and current clients. They represent the revenue that will increase your personal income and the value of your firm. The more time you dedicate to these activities the more successful we believe your firm will be. And, when it is time to retire, you may maximize the value of your firm when you sell it to other members of your team or a third party.
You might also ask yourself what your personal time is worth? If you’re like most financial advisors, the answer is a lot – your knowledge and time are your two principal assets. And, how you allocate your time will determine the future potential of your firm.
As an RIA, there is a lot of pressure on you to produce competitive rates of return. You are always looking for ways to grow your business and at the same time live a balanced lifestyle that works for you and your family. The more time you spend on your business, the less time you have to spend on family, friends, and personal activities. When you outsource portfolio management, a skilled professional will do the work that frees you up to focus on what matters most in life.
The Outsourced CIO Model: The less time you spend investing your clients’ assets, the more time you may have to add new clients and manage current relationships.
Reason #2: Improve your clients’ results.
You have two choices when it comes to managing your clients’ assets. You can do it yourself or outsource the work to a third party, which could be a professional or a firm.
Ideally, your interests are aligned with your clients. You win when they win.
While no one can guarantee investment returns, your clients hired you because they wanted professional help with managing their assets. Professionals who are CFA Charterholders have obtained one of the highest set of credentials in the global investment management industry, and have spent years enhancing their portfolio management skills.
Although there are no guarantees, it makes sense that professionals who are focused on managing money can produce better results than professionals who are pulled in multiple directions by their businesses. And these professionals are accountable for the results they produce.
The Outsourced CIO Model: Your single biggest responsibility is to act as a fiduciary, which includes producing competitive rates of return for your clients. We believe that this responsibility also has the greatest impact on the success of your business because it impacts the market value of assets under management and client retention rates.
Reason #3: Why outsource to a CIO versus a TAMP.
Some financial advisors outsource their need for portfolio management services to a TAMP. Just like mutual funds, third party money management means the financial advisors’ firms are no longer responsible for making the day-to-day investment decisions. Instead, they are asset gatherers who outsource asset management services to third parties (TAMPs, SAMs, funds). They are the advisors, but they are no longer the money managers.
There can be a stigma associated with outsourcing the management of portfolios. Some potential clients may believe outsourcing means you do not have the knowledge to manage money on your own.
The truth is, in our opinion, outsourcing work to the right portfolio manager improves your clients’ odds of achieving their financial goals. We believe that your client relationships become stronger because you have more time to spend with your clients. On the other hand, we believe that if financial advisor firms retain responsibility for investment advice and decisions, they enhance their relationships with their clients. The importance of the role enhances their stature with their clients.
The Outsourced CIO Model: In an ideal world, the role of money manager is retained by the firm. It is not outsourced to a third party that is a different company.
Reason #4: Your team of professionals impacts the credibility of your firm.
Intelligent investors will often ask two important questions: “Who is responsible for making investment decisions or recommendations for my assets?” And, “what are the qualifications of this professional?”
It may be difficult to convince cautious investors that you are an expert in all facets of your business starting with the most important tasks: planning and investing. Plus, you are responsible for marketing, servicing, and running the business. This structure creates a competitive advantage for bigger firms that can afford teams of professionals.
There is another facet of your role that is worth mentioning. Who is managing your clients’ money when you are out meeting with other clients or prospective clients. It is impossible to do both and one does not benefit your clients.
We believe that the most important role is the professional who is responsible for the investment decisions that impact the achievement of a client’s financial goals.
The Outsourced CIO Model: Your credibility can go up when you add an experienced Chief Investment Officer to your team.
Reason # 5: You can retain more of the fee when you employ the investment professional(s).
You may charge an hourly or fixed fee for your planning services. There is a good chance you charge an asset-based fee for your investment advice and services. Or, your asset-based fee covers the cost of your planning and investment services.
Depending on who makes the investment decisions for securities, ETFs, and other investments you may have to layer on an additional fee or reduce your participation in a wrap fee. Either way, you may be charging your clients more or retaining less.
The Outsourced CIO Model: Your goal should be to retain as much revenue as possible for your firm.
Reason #6: The power of the Internet and your website’s “Our Team” page?
Most financial advisors in America have a website. They would be conspicuous if they did not have a website. Studies show increasing numbers of investors are using the Internet to find advisors and an even bigger percentage are using it to research the services and qualifications of advisors. If investors are able to find your firm online, they often will visit the Our Team page as way to start their research to learn more about your firm and the professional(s) who work there.
It pays to have an updated Our Team page that reflects the backgrounds of the professionals that they might be working with long term. Adding a CIO to the Our Team page will present a stronger team image for the firm.
What happens if there is no team? It becomes the Our Founder page.
The Outsourced CIO Model: Adding the credentials (CFA, years of experience, education) of a CIO to your Our Team page can be a major competitive advantage. This may be the difference-maker that causes investors to initiate contact with your firm or causes them to seek financial advice from another firm with more resources.
Reason #7: You want to accelerate the growth of your firm.
Just about every financial advisor wants to increase the assets, revenue, and value of their firms. Market appreciation, reinvested income, and new money from current clients are important sources of new assets. But, at some time, it can go the other direction with market declines and terminations.
We believe that healthy financial advisor firms have organic growth that supplements the growth that is produced by current clients. But, it takes time to build and execute a marketing strategy that produces significant results. A lot of advisors never get around to developing and executing this strategy because they don’t have the time.
Therefore, freeing up time can be step one for a strategy that will produce higher organic growth rates for a firm. One frequent strategy is to reduce the number of hats you wear from three to two. Many advisors keep planning and marketing and outsource investment management to specialized investment experts.
The Outsourced CIO Model: Advisors focus on activities that add new clients, assets, and revenues. The CIO takes care of investing current client assets – a division of labor that can enhance a firm’s growth opportunity.
Reason #8: Smaller firms can compete with bigger firms.
Bigger firms have layers and layers of overhead that include advisors, managers, analysts, portfolio managers, traders, and administrators. Investors may be greatly removed from the actual decision-makers for their assets. On the other hand, smaller firms consolidate many of these roles and make the professional staff more accessible to their clients.
Does this mean bigger firms are operating at a competitive advantage? If they were, then why are independent RIAs the fastest-growing segment of the financial service industry? We believe this fact is an indicator that investors place significant value on the independence and accessibility of key decision-makers at smaller firms.
The Outsourced CIO Model: Smaller firms still have to meet the expectations and requirements of their clients, in particular clients with larger asset amounts.
Reason #9: Outsourcing your need for a CIO can improve your net profit.
Think of outsourcing to an external CIO as hiring a professional who does not require a big salary, benefits, taxes, an office, or administrative support. And, this one professional is responsible for generating additional revenue that is based on market appreciation, reinvested income, and new money from current clients.
An investment professional with similar qualifications and skills may not even be affordable, in particular for smaller RIAs that have lower amounts of AUM. On the other hand, the compensation of an independent professional can be based on the success of the firm. It’s our opinion that this aligns your interests with the professional who is managing your clients’ assets.
The Outsourced CIO Model: We believe the above information describes a profit center and not a cost center.
Reason #10: You can increase your minimum asset requirement.
In general, with very few exceptions, the more assets a firm is responsible for the higher their minimum asset requirement. We believe that this is consistent with the way investors think. They want to know financial advisors are experienced working with clients that have their asset amounts.
We believe that each increase in an advisor’s minimum asset requirement increases the potential profitability of the firm. That’s because RIAs typically have significant fixed costs, but very low variable expenses.
The Outsourced CIO Model: Higher returns can make it easier for advisors to raise their minimum asset requirements.
Reason #11: You can improve your client retention rate.
Three of the leading reasons why investors change financial advisors are performance, risk exposure, and servicing. Outsourcing portfolio management impacts all three. It can improve the performance of your clients’ assets. It can provide superior risk management that reduces the volatility of client portfolios. And, it frees up more of your time that can be spent on servicing clients who otherwise might terminate your services.
Whether you are servicing clients in a bull or bear market, having an outsourced Chief Investment Officer can assist in managing the stress during uncertain times and different market cycles.
Volatile times can also increase your marketing opportunities. That’s because the number of investors who change advisors triple during difficult market conditions.
The Outsourced CIO Model: Part of your strategy should be maximizing client retention rates during volatile markets while freeing up time to talk to more prospects.
Reason #12: You may get to sleep better at night.
The amount of stress in the financial advisor business can be very high, especially when the markets are volatile. It seems like all of the hard work is for naught when asset values are declining and clients are terminating your services. All of this stress can make a good night’s sleep a thing of the past. While you are ultimately responsible for the investments and oversight of your clients, having a CIO can greatly assist in reducing your workload in relation to portfolio risk and performance monitoring.
The Outsourced CIO Model: Your CIO takes on a lot of the stress associated with the management of market volatility.