Are you using some type of turnkey solution for your investment management practice? Maybe this was a good idea when you first started out, but why are you giving away your profits now?
This article will likely result in some pretty heavy objections from turnkey providers. Before the mail bags start coming in, let me say this: A turnkey solution can be great for many advisors. Unfortunately, I think there are some advisors who stay with a turnkey provider just because they don’t realize that the cost-benefit balance has shifted.
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Let’s start with what a turnkey asset management provider (“TAMP”) may provide:
- Proposal presentations
- Account set-up
- Portfolio strategy
- Access to institutional managers
- Portfolio rebalancing
- Training and support
- Compliance assistance
Especially for a new advisor, a TAMP can provide an instant back office to jump start the practice. A TAMP can also handle the repetitive administrative processes of account management, thus freeing up even an established advisor’s time to serve current clients and bring in new clients.
A new advisor might not have the time, experience or resources to be a self-provider of all of the services offered by a TAMP. Just considering dollars and cents, a TAMP can be a great deal for a new advisor. Even at 40 bps, an advisor with $5 million assets under management (AUM), would pay a TAMP only $20,000 per year.
Now fast forward several years. The firm now has $50 million AUM. Even if the TAMP is charging only 20 bps, the advisor is now paying $100,000 per year. These numbers become even more significant as the firm’s AUM grow. What if the TAMP charges additional management costs within their funds rather than charging the advisor directly? It still impacts the advisor’s bottom line because investors are impacted by total costs – which include both internal fund costs and management fees.
So, why should an advisor consider leaving a TAMP? In addition to saving money, the experienced advisor is capable of making decisions, establishing direct relationships with institutional managers, and determining appropriate portfolio strategies. The ongoing tasks related to account management can be handled with purchasing software and the hiring an account administrator as well as taking advantage of resources offered by custodians and fund companies.
The advisor should be able to estimate the costs associated with bringing account management in-house. In addition to software already in place (such as custodian link, CRM, and Outlook), additional software needs may include portfolio accounting, investment research tools, and rebalancing software. A basic break-even analysis should tell the advisor when the time is right.
Will cutting ties to a TAMP cost money and take time? Yes! But, in the end, the advisor will have more control and will be in a position to grow bottom line!