Published March 1, 2017
Are you looking to grow your financial advisory practice? There are many ways to solve for growth, and one of the less obvious strategies is to outsource money management. In our industry today, investment management has become only one of the myriad services that financial advisors bring to the table in serving their clients. Demand for the holistic spectrum that solves for a client’s entire life cycle is ever increasing and includes financial planning, estate planning, education planning, retirement planning and insurance. While investment management is a huge part of all this, it’s reasonable to say that it’s also the most commoditized part of the process. Advisors who focus on the daily tasks related to building, managing and rebalancing portfolios are not using their time effectively. Indeed, for some advisors it can be a source of great pride and differentiation, and thus emotionally difficult to confront reality.
Here are three reasons why advisors who outsource investment management tend to grow their financial advisory practices more than their “Rep as PM” counterparts. It all comes down to time, simplification and performance.
- Advisor Time Investment. Performing due diligence on securities selection and then following the headlines on those securities on a daily basis is extremely time consuming. In addition, it takes time to put that together in a model or series of models where risk management (beta, standard deviation and volatility) has to be accounted for. This in turn leaves little time for anything else, especially the other elements of wealth management noted above, where the true differentiation and client service delivery takes place. There are endless, low-cost, time-tested managers to whom advisors can outsource all this and free up a massive amount of time. The time gained can be spent on deeper client engagement, personal/family reasons, and most importantly, the pursuit of growth (i.e., seeking referrals and other prospecting activities).
- Simplification Through Standardization. Process-driven advisors who rely on repeatable workflows enjoy the efficiencies afforded by predictable outcomes. Traditionally, the first step in standardization with respect to money management was to build and manage models, with the ability to provide minimal customization, as needed. And while there’s great technology to enable all this, like Tamarac and iRebal, the software is very expensive and demanding of resources. Fast-forward, and the natural evolution of this has been to outsource the entire process. Indeed, there will be a modest layer of additional fees, but that is the price of time saved. Advisors who outsource enjoy more time with their clients and are less distracted with the daily drama of the market. Advisors want their clients to sleep at night, so why shouldn’t they be able to do the same?
- Creating Alpha (Performance). Advisors in the independent RIA space have access to the entire universe of leading-edge portfolio solutions, including turnkey asset managers (TAMPs), myriad platforms (e.g., Model Wealth Portfolios at LPL Financial), separate account managers and outsourced CIO solutions. Not only are there diverse options and conduits to achieve customization through combining managers, model sleeves, etc., but these solutions come with reams of performance data and history that advisors can analyze in their quest to meet their client needs. Rather than focus on security selection and headlines, advisors are better suited by becoming a manager of managers. As an aside, it’s always easier to blame managers for poor performance and simply “fire” and replace them than to explain why you bought an energy company during an oil glut.
In summary, as the wealth management industry continues to evolve, advisors need to adapt to the “efficient frontier” of managing their practices for the dual purpose of continually better serving their clients and seeking growth. Having more time and simplifying everyday workflows will achieve those ends. And finally, access to the open architecture world of outsourced investment solutions should easily satisfy performance requirements. As with every change in life, start slow, test and repeat!