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Third Party Outsourcing of Your Investments

By Dr. David Edward Marcinko MBA CMP™

Turnkey Asset Management Programs (TAMPs) allow independent financial advisors [FAs], Registered Investment Advisors [RIAs] – typically fiduciaries – to outsource the management of some or all of their clients’ assets.

More recently, Certified Public Accountants, law firms and banks also are using them to enter the financial advice marketplace

Managed Account Services

With a TAMP, financial advisors gain access to managed account services that allow them to offload time-consuming functions, such as research, portfolio construction, rebalancing, reconciliation, performance reporting, and tax optimization and reporting, which allows them to focus on clients’ personal financial needs, marketing, advertising and sales concerns

Fee-Based Accounts

TAMPs are a form of fee-account, which charge fees based on a percentage of the total assets managed in the program. TAMPs appeal to independent financial advisors who are building a fee-only business, because they can avoid the cost of building their own fee-accounts platform and can implement a TAMP in about 90 days, instead of the year or longer required to develop the same capabilities in-house.

TAMPs also help independent advisors avoid employee hiring and payroll costs related to internal administration and research, which for a modest program requiring a staff of 8-10 employees can typically cost $1 million per year in ongoing overhead. Because TAMPs serve financial advisors, individual retail investors are not able to directly invest their assets in a TAMP.

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“Meet and Greet” Meetings

So, the next time your FA has a quarterly meeting with you to discuss the status of your investment account or retirement portfolio, just realize that s/he is usually only the middleman. S/he is not buying, selling or trading stocks for you. An “anonymous omniscient other” behemoth firm is actually doing the work and merely placing your name on a glossy automated printed report. Your FA passes the report along as his/her alone, complete with his/her name and firm embossed, therein.  Usually with a supplication like this.

The courtesy of your referral is our only reward.

And, the day of your quarterly meeting, in his/her fancy office, is probably the first and only day the report is even reviewed by the FA. This is why most of the FAs time is spent prospecting, or in marketing, advertising and/or other sales activities.  All the heavy-lifting is done elsewhere.

In the industry, this type of Financial Advisor is known as an asset aggregator. And, in the retail sector, most FAs are asset aggregators or gatherers.

http://en.wikipedia.org/wiki/Turnkey_Asset_Management_Program

Number Crunching

Now, let’s say you have one millions dollars to invest and the FA charges you one percent of your AUMs; annually. This is common in the industry with ranges up to 3%, or so. Yep; that’s ten grand out of your pocket.

The Financial Advisor thus receives about $5,000/per year and the TAMP gets the same; year after year. This is reduced to $2,500 or so, to the FA, after office overhead costs. It does not matter if the market, or your account, is up or down. Such the deal!

Nevertheless, the money is automatically flowing away from you much like an annuity; or cash cow. Since you do not actually write a check out to the FA or firm, you may forget about the fees. Get the idea!

Therefore, a firm with $100 million dollars in AUMs earns about: $1-M X 50% = $500,000/year. With scale-ability, it is easy to see how Wall Street has all those skyscrapers in Manhattan, Chicago, London or Tokyo. AUM fees go up drastically, with little increase in overhead. Remember the economic concepts of marginal revenues and marginal costs!

In the industry, we call this Recurring Income. RI is preferred over a one time stock-broker commission [one-time sale] because it’s producing revenue for the TAMP and FA 24/7/365.

To be sure, it is difficult for FAs to obtain such clients; but once in the fold, clients are loathe to leave.

Assessment

Is it a wonder why big firms and wire-houses [brokerages] place their employee FAs under non-compete clauses? In other words, you the client, are owned by the company. You are not a client of the individual FA. So, when an FA leaves or retires, your account stays with the firm unless you transfer it. Expect to receive a very hard sell to stay, when you threaten to leave.

More:

• Understanding Risk Adjusted Portfolio Performance
• Will Higher Taxes Damage Your Portfolio?
• Do Physician Investors and/or their Financial Advisors Use and Abuse Modern Portfolio Theory?
• More on Modern Investment Portfolio Rebalancing

Conclusion

Now, you know why sales skills are needed – over financial acumen – in this business. A great personality trumps education and brain power, most every time.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Filed under: "Doctors Only", iMBA, Inc., Investing, Portfolio Management | Tagged: TAMPS, Turnkey Asset Management Programs | 5 Comments »