Must advisers manage money?

When it comes to outsourcing the investment management part of their business, Jon Ten Haagen and Krzysztof Garlewicz are of different minds. Mr. Ten Haagen, founder and principal of Ten Haagen Financial Group, believes his clients are better off because he is outsourcing their portfolios to market experts. “My job is to educate clients and hold their hands,” he said. “And to the other advisers who say I shouldn't be outsourcing, I tell them they're full of it. They're not trained to manage portfolios.” Mr. Garlewicz disagrees. “I'm not a fan of [outsourcing], because I believe in full transparency and also being clear about the services being provided,” said Mr. Garlewicz, owner of Prosperifi. “Often times you'll see an adviser charging a client a fee and then either using a model or centralized portfolio that is pretty much what the robo-platforms are doing,” he added. “Seems like the old days where you have to roll up your sleeves and work is going away. If you're just managing the relationship, you're no longer an adviser, you're a relationship manager.” Despite a logical connection between financial planning and investment management, advisers are moving away from managing client portfolios in favor of outsourcing. The 2016 Fidelity RIA Benchmarking Study found 27% of advisers are outsourcing at least a part of their portfolio management duties. The 2016 Northern Trust Study of Investment Management Outsourcing, conducted in partnership with InvestmentNews, found that 32% of RIA firms outsourced, while a 2016 TD Ameritrade white paper, “Outsourcing: A strategy for optimizing resources,” found that 58% of advisers outsourced the investment management function. Given the increasing complexity and regulation facing the financial advice business, such as the Department of Labor's fiduciary rule for retirement advice, more advisers are at least considering outsourcing as an option.

Window-shopping

Mark Germain, CEO of Beacon Wealth Management, has mostly resisted the tug toward outsourcing investment management. But he admits he has done some window-shopping. Aside from certain difficult-to-access municipal bond categories, Mr. Germain said the numbers on outsourcing haven't been attractive enough for him yet.

“My job is to educate clients and hold their hands.”—Jon Ten Haagen, founder and principal, Ten Haagen Financial Group “It's not as inexpensive as it sounds,” he said. “And if somebody else is managing your client portfolios, it is very difficult to make changes if something happens in the market.” “If you are an investment professional and you're outsourcing the investment management, you lose the ability to do some things you believe are necessary,” Mr. Germain said. “The outsourcing mentality is for people who do not have an investment background or inclination to do the work involved or the research.” There is no shortage of companies willing to take over investment management duties for advisory firms. Custodians, turnkey asset management platforms (TAMPs) and robo-advisers make it increasingly inviting to just hand the investment management keys over to someone else. Toss in the power of a finely crafted marketing pitch, and the question suddenly becomes, why not outsource? “It's our focus to say that the real value an adviser adds is advice, because the investments are becoming commoditized,” said John Anderson, managing director of practice management solutions with SEI Advisor Network, one of the oldest TAMPs in the industry. SEI, which has worked with advisers for 24 years, now manages $55 billion for approximately 8,000 advisory firms. “The difference between one large-cap fund and another will be negligible over the next 20 years,” Mr. Anderson added. “What I'm seeing as the value proposition for an adviser is their ability to do exactly what advisers do.”

Robo competition

When it comes to supporting the trend toward outsourced investment management, firms like SEI clearly have a dog in the fight. With that in mind, Mr. Anderson cites the latest iteration of outsourced investment management as another reason to outsource. “If advisers are competing with the robo-platforms, they have to be prepared for 25 basis points in fees,” he said. “But if they're competing with things like behavioral finance, goals planning, retirement planning, then you can get paid for advice and charge 100 basis points.”

“If you're just managing the relationship, you're no longer an adviser, you're a relationship manager.”—Krzysztof Garlewicz, owner, Prosperifi

SEI, like most firms looking to handle the investment management part of a financial adviser's business, has surveyed, studied and analyzed the topic to the point of being able to make a solid case for outsourcing. The firm's data show that client managers who focus more on business-building than investment management have an annual client growth rate of 5% and an annual asset growth rate of 18%. The investment managers, meanwhile, have a 3% annual client growth rate and an 11% annual asset growth rate. Mr. Ten Haagen outsources clients to the SEI platform. They are charged approximately 1% of their assets under management for portfolio management, on top of which Mr. Ten Haagen charges his 1% asset-based fee. Betterment, a six-year-old robo-advice platform, manages $6.2 billion for more than 200,000 consumers and works with 400 advisory firms. “The rise is primarily a response to advances in technology and what you can do with it, but also because RIAs are comfortable with outsourcing,” said Cara Reisman, Betterment's head of distribution and business planning. Betterment charges advisers a platform fee of 25 basis points, which compares to its direct-consumer rate of between 15 basis points and 35 basis points. In terms of demand from advisers, Ms. Reisman said Betterment is seeing the full gamut. “We're definitely seeing growth coming from a combination of advisers who used to managing the money in-house and realizing this is a great way to scale their business,” she said. “We're also seeing advisers come over from other outsource relationships. [While] we see some advisers using us as a core portfolio, others are using us for just small accounts, and others are using us for all their accounts.”

Broker-dealer history

Eric Roberge, founder of Beyond Your Hammock, has been outsourcing his investment management functions since starting his advisory firm three years ago, and he doesn't see the point in doing it any other way. “Inside broker-dealers this is what has always been done; the investment management is offloaded to the investment management department,” he said. “It gives you the ability to do other things to benefit the client, and it certainly can add fees because there's another layer, but I actually reduce my costs to cover that fee. If someone else is doing some of the work, I'm going to cut my fees.” Then there is Paul Schatz, president of Heritage Capital Management, who describes himself as being in the “extreme minority” in still building client portfolios with individual securities. From his perspective, even allocating client assets to a mutual fund could be considered a form of outsourcing. “You become an independent RIA because you don't want to sell products and receive a commission, but you also have to decide what your strength is in business,” he said. Mr. Schatz will use some mutual funds and ETFs to gain exposure to certain niche markets, but he mostly relies on his own quantitative models to build and manage portfolios for clients. About a quarter of his $95 million under management is money he manages for other RIAs on an outsourced basis. So in that sense, he is benefitting from the outsourcing trend. “For me, using another firm to manage assets would be a philosophical sea change, and I don't see myself doing that in the next 10 years,” he said. “I enjoy how my business is structured and I did it that way for a reason.” In terms of serving the kinds of smaller clients that advisers often say are better served on outsourcing platforms, Mr. Schatz has found a simple solution. “I just don't work with smaller clients,” he said. “But I will give smaller clients, especially younger people, a free portfolio allocation and offer to meet with them once a year.”