Going all the way back to the 1980’s, financial advisors outsourced money management to mutual fund families and Separate Account Managers (SAMs).
This strategy created a pooled account option and an individual portfolio management option for the advisors’ clients. It also created four major benefits for those financial advisors:
- They freed up time for financial advisors that was better spent providing planning services
- The advisors had more time for sales and service
- Smaller accounts went to funds; larger accounts went to SAMs with higher minimums
- Advisors could terminate under-performing managers and retain relationships with more clients
A more sophisticated use of this same concept is delegating the wealth management function. This can go to an Outsourced Chief Investment Officer (OCIO) inside the firm or a TAMP outside the firm.
The OCIO is a member of the financial advisor’s team of financial professionals. The TAMP is a separate organization that manages money the same as SAMs did in the past.
Increasing numbers of financial advisors are outsourcing their investment management to investment professionals (OCIOs, TAMPs).
These professionals specialize in the delivery of services such as investment research, asset allocation, security selection, risk management, and buy/sell investment decisions.
We believe OCIOs are a superior solution because there are no third parties that influence or control how client assets are invested.
When investors hire RIAs, they are hiring firms that provide planning, investing, and other financial services—all in-house from the same firm.
Financial advisors can use the information in this article to compare OCIOs to TAMPs and select the one that provides the greatest benefits.
Following is additional information that compares the OCIO solution to TAMPs. We can tell you in advance that we are biased towards the OCIO alternative.
This is because we believe OCIOs deliver more value than TAMPs to financial advisors and their clients.
Are OCIOs More Marketable Than Other Money Management Alternatives?
The experts say the more names financial advisors throw at investors, the greater the risk the investors will get confused and select someone else.
For example, there can be a:
- A financial professional
- A financial firm
- A TAMP, SAM, mutual fund, or other external management solution
- A custodian for the clients’ assets (Schwab, Fidelity, Pershing, LPL)
Not only is this a lot to digest for the typical investor, but each of these professionals or firms must also be paid for their advice and services.
Since the OCIO is part of the firm, this is one way to reduce the number of names that must be digested by investors.
Reducing the number of names will make smaller RIAs more marketable because they are more similar to the bigger firms.
How Does an OCIO Increase the Prestige of Financial Advisors?
There is no question portfolio management has the greatest impact on the financial well-being of investors.
Consequently, firms that provide portfolio management services with an internal OCIO have a distinct competitive advantage over firms that outsource the work to third parties.
The reason is simple. Investors will put more value on firms that have the resources to provide planning and investment services in-house.
Are OCIOs More Adaptable Than TAMPs?
It makes sense when an OCIO or TAMP takes over the management of client portfolios that there will be substantial changes to fit their investment strategies, management style, and outlooks.
The question you should be asking is “How substantial are the changes and how quickly do they take place?”
For example, TAMPs that are managing thousands of accounts and billions of dollars may want to restructure portfolios right away and do it their way. Little regard may be paid to the desires of clients or a preferred asset class.
On the other hand, an OCIO may be more flexible and make gradual changes over longer periods of time. This process will be more appealing to clients that have taxable accounts and significant capital gains.
Who Researches Investments for Clients?
One of the biggest questions from many investors is “Who does the research that produces the buy/sell decisions?”
Bigger firms employ analysts who are responsible for researching securities, mutual funds, ETFs, and other types of investments.
Smaller firms make this the responsibility of the OCIO, who spends considerable amounts of time evaluating investment alternatives.
Some OCIOs may have a team of professionals who conduct the research for investment portfolios. Investment goals are met while advisors are freer to seek and close on prospects.
Do OCIOs Provide the Best Sales Support?
It makes sense that clients with accounts of $1 million or more of investable assets will ask to talk to the professional who will be managing their money.
They want to get comfortable with the philosophy and expertise of this professional before they hire their investment program. People naturally want to vet someone before letting them create a defined contribution plan.
OCIOs are available to talk to prospects on behalf of the financial advisors who utilize their services. This creates a major competitive advantage for advisors who use the services of OCIOs.
Do OCIOs Provide the Best Service Support?
The same can be said for current clients who have larger accounts and want to talk to the Chief Investment Officer. An OCIO can be added to Zoom calls to discuss recent results and the OCIO’s outlook for the future.
This creates another major competitive advantage for advisors who use the services of OCIOs.
Can OCIOs Be Integrated Into Financial Advisor Websites?
As many as 82% of investors will visit a financial advisor’s website when they are researching an investment consultant. One of the most visited pages on the financial advisors’ website is the Our Team page.
It stands to reason investors want to know more about the professionals who will be advising them and investing their assets.
Most OCIOs can be profiled on the financial advisors’ Our Team pages. This is a major advantage for financial advisors who want to portray their firms as being full service.
Will OCIOs Write the RIA’s Market Environment Reports?
Larger financial advisory firms produce market environment reports that describe their investment outlook for the future. These usually cover the next six months.
An OCIO can produce quarterly market environment reports that are custom-tailored to the characteristics and outlooks of their clients.
They do not produce cookie-cutter, one-size-fits-all reports that are so generic they have little or no applicability.
How important are the OCIO’s credentials?
There are three credentials that matter most to investors: College degrees, years of experience, and certifications.
Financial advisors can find themselves marketing the OCIO’s credentials. In this case the more applicable the degrees, the more years of relevant experience, and the higher the quality of the certifications, the better.
FYI, a CFA is the best credential based on curriculums and testing.
How Does the OCIO Make the Financial Advisor More Competitive?
Smaller RIAs will be more inclined to outsource the asset management function to an OCIO or TAMP.
Larger RIAs will be more inclined to provide this function in-house with full-time employees. They rarely outsource to TAMPs or OCIOs.
When the smaller RIAs utilize the services of an OCIO, they are more competitive with bigger RIAs that have more substantial budgets for hiring full-time investment professionals.
The OCIO alternative can facilitate the growth of the advisors’ firms. This defined benefit is hard to top.
Who Is More Expensive, the OCIO or the TAMP?
It stands to reason that a TAMP has more overhead. It is going to be more expensive than an OCIO, who may be a sole practitioner or part of a smaller team of investment professionals.
In some cases, the TAMPs may be several times more expensive and their fees are comparable to actively-managed equity mutual funds.
It also makes sense that the more basis points the financial advisor charges, the less competitive the advisor may be. This may be impacted by the financial advisors’ disclosure practices for expenses.
When advisors practice full disclosure for all fees, investors will see layers and layers of fees being deducted from their accounts.
One all-inclusive fee for planning and investment is preferred by most investors.
What Is the Cost of a Full-Time CIO Who Is an Employee of the Firm?
There is no question an OCIO is the lower-cost option compared to the full-time CIO, who is an employee of the firm.
A lot of expenses are associated with the employee alternative when CIOs have great credentials and records of achievement: Substantial mid-six-figure salaries, benefits, taxes, bonuses, support, and stock options.
All of these expenses can be avoided with outsourced CIOs for as long as it makes sense for the firm.
Who Owns the Client – The Financial Advisor, OCIO, or TAMP?
There is no issue when the investment management function is provided by an OCIO. The planning and investment services are covered by the same financial advisor service agreement.
The process is a little more complicated when a TAMP is named as a sub-advisor or has a separate service agreement.
This can be an issue when an investor wants to terminate the services of the financial advisor and retain the services of the TAMP.
There should be no issue about who owns the client. It is definitely the financial advisor.
How can OCIOs facilitate a bundled service approach?
A very high percentage of financial advisors provide bundled planning and investment services that are covered by one asset-based fee. This is much easier to do when all of the services are in-house.
The advisor provides planning services and the OCIO provides investment services. They are wrapped together for billing purposes and are covered by one asset-based fee.
How Are Clients Better Off With OCIOs?
Clients are better off when they receive all of the services they are seeking from one source.
Advice is more integrated and duplicate/conflicting advice is avoided when all of the planning, investing solutions, risk management, and tax advice come from the same firm.
In an ideal world, investors make one selection decision and they receive all of the financial advice and services they need from a relationship with a single firm.
The one exception is the third-party custodian—ideally to a brand name firm.
How Are Financial Advisors Better Off With OCIOs?
There are several ways financial advisors are better off when they outsource investment management to an OCIO. They can:
- Spend more time marketing their services to prospects
- Allocate more time to communicating with current clients
- Produce better investment results for their clients
- Be more competitive with bigger firms
- Have a stronger presence on the Internet
- Provide a one-stop solution for their clients
Whenever you’re ready to see how much better things can get, please reach out and contact us.
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.
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