We came across ESE Consulting, which specializes in helping wealth managers set up turnkey asset management programs (TAMPs) during one of our client projects. TAMPs represent an opportunity for research providers, so we asked ESE to share their insights, below…
considering asset management as a potential revenue stream-or which already
have asset management affiliates-should consider the opportunities presented by
turnkey asset management platforms (TAMPs).
TAMPs need high quality content in the form of model portfolios, asset
allocation, and investment strategy. By
contributing content, research providers can earn asset management fees without
incurring all the costs involved with asset management subsidiaries.
downturns like the current environment, individual investors gravitate to
financial advisors. Not long ago, the
retail landscape was dominated by traditional Stockbrokers who spent their days
“dialing for dollars” to generate transaction-based commissions. But at
least since the turn of the century, investor demand has been growing for
holistic services, including financial planning, estate planning, asset
allocation, and portfolio management. In recent years that trend has
further accelerated, keeping pace with the gathering tsunami of Baby Boomer
retirements. And just as Stockbrokers once morphed into Financial
Advisors, Financial Advisors have increasingly assumed the mantle of
“Wealth Manager,” with many taking on full fiduciary responsibility
for their clients’ assets, swapping large portions of their commission-based
revenues for significant percentages of the assets they now manage.
For these new Wealth Managers, the principal business imperative has shifted to
gathering and retaining assets. These advisors no longer count investment
strategy and portfolio management as core competencies. Instead, they
tell High Net Worth clients up-front that their job is to oversee the Big
Picture – which, in the case of investments, means choosing reliable
Strategists to manage effective and appropriate asset allocation and portfolio
models, often right down to the individual investments.
us to The Opportunity. Wealth Managers share a significant portion of
their asset-based fees with their Strategists – firms that provide and manage
diversified portfolios that are used over and over in investor accounts. Research
firms that are nimble enough to direct even a small part of their analytic
talent toward creating effective Strategies can compete for those management
fees today in ways that would have been nearly impossible just a few years
ago. What’s more, for many investors “consistency” and “reliability” have
become the words of the day, while “spectacular” is now synonymous with
“too risky” — no longer even on the menu. The bar that measures
performance has been lowered, in other words, which makes entering the fray
easier. As long as overall returns can consistently be described as
somewhere between “solid” and “strong,” most of today’s advisors and investors
are more than satisfied.
So all right: why bother with all of this? The primary reason is to develop new sources
of revenues. Asset management fees
represent “sticky” revenue streams that are as reliable as any such streams can
be these days. Thankfully, over the past few years some new ways have
emerged for independent research shops to leverage their existing businesses to
begin collecting their share.
So. Time to offer a bit of guidance about the “how” of all this. At
ESE, which specializes in assisting wealth managers create TAMPS, we’ve found it useful to boil the options down
to 5, all of which are grounded in managed money – alternately known as “assets
under management,” or “AUM”.
1. Create and sell asset allocation models.
This is probably the fastest way to leverage what you know: create asset
allocation models, and sell them to asset managers, advisory firms, online
brokerages, turnkey asset management platforms (“TAMP”s), RIA’s,
insurance-based advisors, and so on. An asset allocation provides the
mold into which an advisor can then pour the contents of a portfolio model to
create a tailored client portfolio. Model managers typically follow
Modern Portfolio Theory, aligning their allocations along the “efficient
frontier” curve to provide options which the advisor then aligns to each
client’s risk tolerance. Over the years, many studies have suggested that
asset allocations may ultimately have a good deal more to do with portfolio
performance than the specific investments that are chosen to fill them
2. Create and sell model portfolios.
Research firms which do not provide investment strategy but have good track
records for their buy/hold sell/recommendations, can create model portfolios
for use in TAMPs and other advisory channels.
If you can bring a fresh perspective, and focus your efforts on a
particular area (for example, looking for reliable ways to generate income for
retirees concerned about today’s so-called “longevity risk” – the possibility
that their money may run out before they do) — you can secure a niche that
will help you cut through the clutter.
Package your research into portfolio models, and work with an ETF provider to
launch an ETF.
One of the chief advantages of creating an ETF has been that in general they’re
managed as passive instruments: once you create it, there’s little
trading and turnover to manage within its holdings. ETFs began as
lower-cost, more liquid alternatives to Index Funds, and the vast majority are
still set up to mirror benchmark indices. In recent years, though,
there’s been a movement toward so-called “active” ETF’s, and there’s certainly
room for new entrants.
4. Package portfolio models as sub-accounts to be used by variable annuity
Providers of variable annuity products have once again begun proliferating, as
Boomer retirees proliferate. Providers are typically insurance companies
– and insurance companies don’t typically have deep research teams. As a
result, they’re always looking for fresh portfolio models, and they often turn
to model managers as sub-advisors.
5. Become a separate account manager.
In this case, you’ll be leveraging your firm’s deep knowledge of a particular
sector or trend to create a basket of stocks which you’ll actively manage
against a benchmark. Of the 5 options listed here, this is the most labor
intensive, demanding by the far the most complex management infrastructure,
oversight, etc. Separately Managed Accounts (“SMA’s”) are in fact hard to
distinguish from actively managed equity funds, except SMA investors directly
own pieces of the underlying stocks, allowing the potential for more efficient
tax management. The minimums required for investment tend to be far
higher than those for mutual funds. But while this is the most
cost-and-labor intensive alternative, it’s also, appropriately enough,
potentially the most lucrative.
Finally, we offer below a few summary suggestions that can help as you consider
the pro’s and con’s of setting out in the new direction we’ve been outlining:
1. Consider managing models — not money: the easiest way to
manage portfolios in the managed account space is to launch them as models that
your firm can send to retail firms or intermediaries. The actual assets
will then be invested by the financial advisors who use your models to help
them manage their clients’ assets. Managing a model is much easier than
managing a mutual fund, precisely because you manage the model, not the
money. What’s more, the payoff can still be considerable: for this
kind of service you can collect somewhere between 15 and 35 basis points.
2. Make sure your models are practical for intermediaries: in the
end, retail investing is a practical pursuit, so be sure to keep the number of
stocks in your models under control. Most successful models are
constructed so financial advisors and their clients can comfortably jump right
in. A typical separate account will include no more than 25 to 50
stocks. Keeping a lid on that number should in turn help you control
transactional turnover, which is also very important. Too many
transactions ultimately raise the cost to the investor, while creating more
uncertainty than most people are looking for these days. Then, too,
there’s a ton of the added paperwork so many advisors have come to hate.
3. Put your creativity at the service of common concerns: aim to
package your research into portfolios whose goals will be instantly embraced by
the retail investors who have serious money to invest. For example, this
is a great time to focus on creating retirement portfolios that emphasize
income or capital preservation, taking so-called “longevity risk” into
consideration. At a time when people are more worried about stretching
their funds than in any prior generation (thanks to their stretching life
spans), the more esoteric your portfolio’s goal, the less assets you can
probably expect it to attract.
4. Cover all bases: ideally, you’ll want your portfolio models to
be used in as many different parts of an asset allocation as possible. An
investor in a managed account typically has his or her money there in the first
place because they (or their advisor) believes in having a diversified portfolio
that matches an asset allocation. You’ll earn more money if your models
are diverse enough to power many or even all slices of that kind of asset
5. Packaging and distribution aren’t after-thoughts: they’re
really where the retail game is won or lost. The good news is that you do
have choices. The most basic is whether to focus your efforts on selling
directly to specific broker dealers, or to try instead for greater mass by
distributing your models through the turnkey asset management platforms
(“TAMP”s) now used by so many thousands of RIA’s and brokers. Remember
too that establishing a track record is crucial – back-tests can work to get
you started, but expect much larger asset flows once you have a 3-year track
For most independent research shops, the game we’ve been describing is very
different from the one they’re used to. But in times like these,
predictable revenue becomes more important than ever. When managed
correctly, the portfolio model / asset allocation business has proven to be
both financially rewarding and relatively uncomplicated, while providing
perhaps the most direct route to some very “sticky” revenue streams indeed.
Burt Shulman, Managing Partner, ESE Advisory Group LLC
ESE Advisory Group LLC is a consultancy specializing in providing support to
wealth management intermediary and technology companies. Among their
areas of specialization, they have particular expertise in helping independent
research providers leverage their analytical expertise to build and sell
portfolio and asset allocation models.