Advisor Liquidity and Ambition Create “Sweet Spot” for Outsourced Portfolio Programs

Posted by Scott Martin. Contributor — on August 19th, 2012

Wealth managers once obsessed with survival at any cost are now looking to team up with the firms that can give clients and prospects world-class performance at a lower price while leaving the advisor in the driver’s seat.

Phones are ringing. Consultants are frantic. But unlike last summer, it’s not because the market is crashing and advisors are desperate to find ways to cut their way to profitability.

“Firms are finally feeling healthy again after the 2008 crash,” says Paul Ahern, principal of wealth management consultancy Winslow Capital Group. “They feel that they can plan ahead and are looking for ways to scale up in the face of reviving competitive pressure.”

Ahern says many of those advisors are reactivating long-dormant discussions with  managed account platform providers in their quest to lay the groundwork for sustainable growth.

For Trust Advisor readers who may be equally eager for efficiency but have yet to pick up the phone, our new report “The Advisor’s Guide to Outsourced Portfolio Solutions” is now complete and ready for no-obligation free download HERE .

Ahern and a fellow consultant, Robert Ellis of Fast Track Advisors. did the heavy lifting to provide what might be the first truly comprehensive advisor-level, platform-agnostic look at how these programs work, how much they cost and where large and small firms alike can find the right partner.

And our own Steven Maimes contributed the research nuts and bolts on giant vendors like Citi Investor Services, Envestnet, Genworth and SEI not to mention some of the best emerging names you might not have heard of yet.

Lower costs, better performance and space to grow

“Outsourced asset management programs allow advisors to focus on what they do best, which is work directly with their clients,” Robert Ellis explains.

In theory, that’s a no-brain move, but it’s only in the last few years that the concept overcame industry resistance.

Advisors who once defined themselves professionally in terms of the investment performance they could personally deliver for clients have accepted just how expensive and even quixotic their “do it yourself” dream really is.

And asset managers with no retail sales networks of their own who have already built best-in-class investment strategies are hungry for ways to actually deliver those ideas to investors and earn a fee.

But by feeding the ideas directly into their own clients’ portfolios, advisors can breathe easier that the due diligence, manager selection and even the macro allocations themselves are taken care of and time once spent on these tasks can be diverted to prospecting new accounts.

It’s a classic win-win division of labor scenario, updated to take advantage of modern technology and flexible enough to work for entrenched money center banks and independents alike.

“People who are running pure investment advisory firms have turnkey solutions to choose from where everything is built into a coherent whole,” explains Karla Paxton, a breakaway broker consultant turned technical relationship manager at ByAllAccounts.

“Higher level firms are looking more toward a way to incorporate managed accounts into the asset management functions they’ve already built and want to maintain,” she adds.

“Maybe they want to source out the due diligence or certain asset classes, or even the task of creating investment policy statements for their new clients. These are all options that are out there.”

On a pure AUM basis, Paul Ahern estimates that an all-in-one approach more formally known as a turnkey asset management program or TAMP is most popular among firms with under $1 billion on their books.

Above that level, there are probably too many moving parts already on the table to simply rip everything out and start new. For these firms, hybrid relationships with a TAMP or multiple specialized vendors start to make sense, Ahern says.

By the time you get above $15 billion in AUM, everything’s a la carte again. That’s how the money center banks and wirehouses built their managed account platforms and where giants like LPL may be looking to become competitive vendors.

“LPL wants to be in this space, not just as an owner of outsourced portfolios for its own affiliated advisors but as a distributor in its own right,” says Ahern.

UMA keeps building critical mass

Large or small, new or old, most new programs of this type follow the unified managed account or UMA model, in which the assets stay within the advisor’s custody platform and only the third-party manager’s ideas are brought in or “overlaid” on participating accounts.

That’s an improvement in a lot of ways over writing a check to an SMA sponsor and shifting the assets out of house.

For one thing, maintaining custody clarifies fiduciary questions. The advisor always knows where client assets are and what’s in every portfolio.

A position that doesn’t work with a particular account due to tax or social responsibility ramifications, for example can simply be overridden.

And thanks to the UMA and its now famous “sleeve” structure, your clients can invest in any combination of conventional and alternative asset classes, all in the same account.

Next-generation solutions like Citi’s UMH platform give advisors even finer control of the asset flows by expanding the view from the account to the household level.

You might not know the difference between a UMA, an UMH and an SMA much less a model-only wrap program or an overlay platform but there’s no need to worry.

In addition to a who’s who of top vendors and a step-by-step checklist for advisors looking to find the right partner, our guide includes an exclusive 7-page glossary.

That way, if and when you decide to start making your own calls, you know exactly what you want and what you don’t whatever the company on the other end of the line wants to call it.

Scott Martin. senior editor, The Trust Advisor

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