As the owner of a financial advisory firm, you already know it takes a sophisticated business plan to build a firm that manages substantial amounts of assets under management. It takes time, money, and the right plan to build this type of firm one client at a time.
There is obstacle number one. How do you find time to build the firm when you wear so many hats already? For example, you are responsible for marketing, planning, research, money management, administration, and other responsibilities that consume your most valuable resource – time. The net result is spending a little time here and there to keep many balls in the air simultaneously.
There is a better way! Outsource two of the bigger consumers of time: They are investment research and portfolio management.
Two popular models have emerged in this space: Turnkey Asset Management Platforms (TAMPs) and the Outsourced Chief Investment Officer (OCIO) model. This blog will explore the TAMP model’s features, benefits, and potential drawbacks. We’ll also discuss how outsourced CIO solutions work for comparison purposes. Let’s get started.
Read our latest Quick Guide: OCIO VS. TAMP: Which Outsourcing Strategy Produces The Best Results?
What is a TAMP?
A TAMP offers a comprehensive suite of investment management services to financial advisors. Key features usually include research, portfolio management, trading, and administrative tasks, including billing and reporting.
The primary goal of a TAMP is to manage money for financial advisors who prefer to outsource this need to a third party. This is similar to commission representatives gathering assets for mutual funds. The advisors are not involved in the investment process so they can focus on adding new clients and serving current clients.
Here are some of the key advantages of TAMPs:
- TAMP services come pre-packaged, meaning less time spent on back-end tasks
- Add new clients without taking on any additional portfolio management work.
- Some TAMPs offer customization, allowing advisors to retain some control over their investment strategies.
While TAMPs offer numerous benefits, they also come with a few drawbacks.
- One of the most frequent concerns about TAMPs is their cost, which may average 50-75 basis points on top of the financial advisor’s fees. These expenses have two impacts. The financial advisors’ combined fees may not be competitive with other financial advisors. And higher fees hurt net performance, which may contribute to client terminations.
- TAMPs often provide canned solutions. This can be problematic if you want to offer personalized portfolio solutions to cater to the unique requirements of your clients.
- Outsourcing asset management means advisors cede an important part of the decision-making process to a third party. You may feel uncomfortable relinquishing this much control to a firm with limited knowledge of the investors’ circumstances, concerns, requirements, risk tolerances, and goals.
- Integration with your existing systems or services can impose big challenges. Not all TAMPs will seamlessly integrate with your current tech stack, which can lead to operational inefficiencies.
- When you use third-party solutions, there’s a risk that the uniqueness of your brand might be diluted. Clients may start seeing your firm as just another asset gatherer for a third party that is managing their assets.
- Some TAMPs might have affiliations, ownership, or partnerships with certain investment product companies. This can raise questions about whether the TAMP is always acting in the best interests of the financial advisor’s clients. Transparency is extremely important in these situations.
- Your clients might feel you are outsourcing a core component of your service offering to an unknown third party that knows little or nothing about them. This can lead to questions about your value proposition and the fees you charge clients for your advice and service.
- There’s a potential danger that your firm will become increasingly dependent on TAMPs, making you less effective when you meet with your clients.
- Even when outsourcing, you and your team are still responsible for conducting due diligence on the TAMP. This means ensuring the TAMP platform is always acting in the fiduciary best interests of your clients.
A Look at the Outsourced CIO Solution
Now that you have a better sense of what a TAMP does, we will explore another third-party solution: the outsourced CIO.
The OCIO model is not just outsourcing money management to a third party. It is about taking a new team member that manages your clients’ assets for you. An outsourced CIO becomes a team member by taking on a more substantial role than a TAMP by acting as your firm’s Chief Investment Officer.
An OCIO is responsible for research, portfolio management, reporting, and other high-value services as part of your firm.
Think of an OCIO as part of your team, working side-by-side with you to manage your clients’ assets. This is much different than outsourcing to a third party with its own identity and purpose.
Advantages of Outsourced CIO Solutions:
Tailored Strategies: Outsourced CIO services focus on crafting a strategy that fits your firm’s needs and goals. There is a big difference in managing money for millennials and baby boomers.
Expertise: Access to seasoned professionals who bring a wealth of experience to your firm.
Credentials: It is easier to market your firm’s money management services when your OCIO is a CFA Charterholder with decades of experience.
Flexibility and Control: Unlike TAMPs, the OCIO model allows for a more collaborative approach, ensuring your voice is always heard.
Cost-Effective: OCIOs can be more cost-effective than TAMPs. Fees are generally lower, so net returns can be higher.
Agnostic: Most OCIOs are agnostic regarding custodians, so you don’t have to move current clients to a new custodian.
TAMP vs. OCIO: The Verdict Is In
While both TAMPs and outsourced CIO solutions aim to assist RIAs and IARs in streamlining their research and portfolio management operations, their approaches are fundamentally different.
TAMPs are like a toolkit – they’re great for firms looking for a hands-off approach and are willing to work within the parameters set by a third party that does not know the clients. This may sound a lot like investing in a mutual fund, and that would be an accurate assessment.
On the other hand, outsourced CIO solutions are like hiring an expert craftsman. They provide services adaptable to a wide range of client situations: Equity, balanced, fixed income, domestic, and global accounts. This personalization makes your firm more marketable. Meanwhile, your firm is more marketable because you are the money manager.
An outsourced CIO model may be the ideal choice for firms that want a more customized solution and are looking for a genuine partnership.
Contact us directly to learn more about Cornerstone’s customized OCIO services for RIAs and IARs.
