In our last blog post – Emerging Advisors Can’t Risk Manage Assets – we noted that a growing number of emerging advisors are searching for a more risk-managed investment approach having suffered the consequences of two major market declines already and sensing there could still be another one in their future. We also pointed out, that many of these advisors are looking for an outsourced investment solution having realized the difficulty of pursuing a risk-managed approach on their own. The good news is that there is no shortage of reputable TAMPs (Turnkey Asset Management Programs) to choose from. The bad news – based on our conversations with many of you — is that TAMPs just don’t measure up.
What’s not to like? TAMPs leverage some of the latest and most cutting edge technology to provide advisors with access to a stable of money managers through an easy to use user interface that may also offer (depending on the TAMP) proposal generation, risk profiling software, reporting, online client portals, fund due diligence and investment research. With these platforms, advisors can save time or gain access to additional funds or improve fund choices. Sounds good!
So again, what’s not to like? Advisors are telling us that prices are too high; service is lacking; the solutions are not designed with the advisor in mind; and many lack attractive risk-managed tactical investment solutions that they would feel comfortable using with their clients.
Prices Too High. The current secular bear market is providing advisors and their clients with smaller gross returns, which means keeping all-in cost low is becoming of greater importance to net returns. After adding the platform fee, strategist fees and underlying fund fees, an advisor may be asking his/her client to absorb more than 2.00% even before the advisor bills the client his own 1.00% fee. Consider the historical return for a balanced asset allocation averages roughly 8.00%, so a 3.00% fee represents nearly 40% of the gross return and leaves the client a net return of only 5.00%. And, of course, we all know returns have been running less than the historical average so far this decade. Clearly those all-in costs have become very valuable real estate in this low return environment.
Service is Lacking. An advisor should reasonably expect superior service when paying such high prices, but that does not seem to be the experience of the advisors with whom we have spoken. Indeed, several have commented that service has been poor: that operations staff spend too much time trying to hold the TAMPs attention, correcting errors and re-educating the TAMP team about the advisors business whenever there is turnover. They feel no more important than a firm who is only one small firm amongst a list of hundreds or thousands … which, of course, is the truth in many cases.
Failure to Design a Solution Tailored for the Advisor. Advisors are time and resource constrained. Many are so busy providing investment management, financial planning, back office operations and compliance, that while they are meeting their clients’ personal and financial goals, they are not meeting their own lifestyle or growth goals. They not only require solutions that relieve those time and resource constraints but also help them leverage their newfound time to realize their goals. Based on our conversations with emerging advisors, the solutions offered to advisors tend to reflect the designer’s experience or vision rather than the advisor’s needs. The crux of their disappointment is twofold:
- Rather than offer a comprehensive investment outsourcing solution to free advisor time for client facing activities and then helping them leverage that newfound time to achieve their goals, instead the platforms simply apply technology to provide easier access to solutions that were otherwise already available to advisors. While there are clear advantages in doing this, advisors are often still heavily engaged in fund research, selection, oversight and other tasks – the work is streamlined but not truly outsourced.
- Rather than build investment solutions that manage assets at the household level, allocate securities to taxable and tax deferred accounts according to tax efficiency, or accommodate special client circumstances such as legacy low basis stock, instead money management firms frequently view the TAMP platforms as distribution channels for their “one size fits all” fund products. What’s more, many of those funds have no interest in talking to their advisor customers, especially once the sale is made.
Inadequate Risk-Managed Tactical Solutions. To address growing client concern about capital preservation and protect their practices from client disappointment in a third major market decline, advisors are in search of more risk-managed tactical investment strategies. Moreover, they increasingly realize that the time and resources required for such a strategy are too great to pursue alone and demands an outsourced solution. The good news is that following the financial crisis in 2008/2009, tactical investment strategies flourished. The bad news, is that these strategies are often of limited value to advisors: first, most have only a limited track record; second, some are little more than a fund-of-funds that invests in the investment company’s pre-existing funds; third, many of the newer funds are quantitative or technical analysis driven funds which the financial crisis proved will eventually fail; and fourth, some of these tactical strategies swing allocations dramatically between all-in and all-cash which is antithetical to the anti-market timing preference of most advisors.
By taking more than a year to speak with emerging advisors and by drawing from more than twenty years of our own “boots on the ground” experience building Pinnacle Advisory Group before we launched Pinnacle Advisor Solutions, we believe we have designed solutions that “measure-up”. Specifically, (a) our all-in costs are substantially less than most TAMPS even while offering a more comprehensive solution set; (b) our relationships with advisors are structured as strategic partnerships wherein we work together to grow the practice profitably; (c) our solutions are designed to completely free the advisor from back office and investment management responsibilities and then help the advisor leverage the newfound time to build the practice profitably; and (d) our risk-managed tactical investment solutions are nearly 10-years GIPs compliant, proven to consistently generate better-than-benchmark returns with less risk and proven among the more than 650+ families and $1 billion managed by Pinnacle Advisory Group. Indeed, our solutions are by advisors for advisors and we know they work because “we’ve been eating out own cooking for some time now”.
Stay tuned and we’ll talk more about our risk-managed tactical asset allocation solutions in our next blog post on 10/31.
