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10 questions to ask third-party asset managers

by Jan 24, 2018Advisor perspectives

10 questions to ask third-party asset managers

by Jan 24, 2018Advisor perspectives

Money managers add value beyond investment expertise, freeing up time for advisors to do what they do best. How do you evaluate them?
They say the only thing worse than wasted time is wasted money. But for independent financial advisors, the two are inextricably linked—and for those advisors who are successful, waste in either bucket is not an option.

It’s not easy being a financial advisor, especially in today’s complex financial environment. Clients need a lot of attention, and advisors offer far more services than first meets the eye. One successful advisor interviewed in the Maryland area has identified 50 discrete client-related “major financial tasks” to review for each and every client. Then, like any other business owner, there are the day-to-day office duties to handle, employees to manage, and strategic business concerns to address with a vigilant eye.

For financial advisors running small businesses, it can feel like there aren’t enough hours in the day. That is one critical and pragmatic reason why more and more advisors are partnering with third-party asset managers, especially money managers who add additional value through sophisticated risk-management approaches.

More advisors are partnering with third-party asset managers, especially money managers who add additional value through sophisticated risk-management approaches.
However, unlike partnering with, say, a tech vendor, where a demo might clearly illustrate a “cut-and-dried” reason why it’s advantageous to use their product or service, it’s not always easy for a financial advisor to make the decision to outsource the portfolio-management function. Many advisors, especially those who have been in the business for years, may still feel that “portfolio management” helps define who they are as an advisor.

However, it makes sense to do so. This kind of partnership gives advisors the time they need to focus on their core business—clients—and immersing themselves in the information gathering that will inform the strategies that will produce the financial outcomes those clients want.

A Forbes article reinforces this point, saying, “Financial advisors can offer a tremendous amount of value by dealing with extremely complex tax issues, investment choices, and emotional decisions impacting one’s financial well-being. Furthermore, they make people more secure for retirement, increase their client’s wealth, and help people feel more confident about their financial status.”

And the facts back this up.

A study by the Investor Protection Institute, a tough critic of the business, acknowledges to consumers that financial plans work. “Research shows that over a lifetime, investors with a financial plan accumulate about 20% more wealth than those with no plan.” A Morningstar paper places the figure even higher, with estimates of the advisor impact helping to create “29% higher retirement income wealth.”

Components of an effective advisor business plan
Successful advisors are more likely to set specific asset and revenue growth goals, formulate new-business and client-retention objectives, and to incorporate team roles and responsibilities into the planning process.
Third-party asset managers can play an important role in wealth creation and lifting some of the financial advisors’ time and resource burden, allowing them to focus on what they do best. Is it really feasible today for an advisor to not only develop a sound fundamental portfolio approach for 50, 100, 200, or more clients, but also to worry about the day-to-day implementation and monitoring of all of the various strategy combinations their many clients should have?

The expertise a third-party active asset manager can offer, when coupled with the financial advisor’s top-notch customer service, creates a valuable package to offer any discerning client. Of course, as with any effective partnership, the asset manager needs to be properly vetted before any relationship is established. Due diligence on third-party asset managers is becoming an increasingly important task for the individual independent advisor, their firm and associates, and their broker-dealer.

When advisors are selecting potential asset manager partners they have to evaluate, for instance, whether the asset manager is using the most sophisticated tools, algorithms, market analysis, and data available. Predictive analytics are increasingly complex, and the technology used to support this data gathering and reporting is constantly advancing. It is important for a financial advisor to know what systems the asset manager is using, how the data is pulled or mined, how it’s analyzed, how often, and by whom. The financial advisor should know how the asset manager is benchmarking current performance against market performance, or whether they have established their own independent benchmarks.


Feedback from leading advisors shows several areas of commonality in their analysis and scrutiny of third-party managers:
  1. How long have they been doing what they are doing, and how well is it documented?
  2. What are the qualifications of the asset manager’s leadership and analytical team and their bench strength?
  3. What is their specific strategic focus? Is it narrow or broad?
  4. Do they execute well and consistently on their strategies?
  5. Are they adaptable in changing market environments?
  6. Do they have strong risk-management capabilities?
  7. Are their reporting systems timely and user-friendly?
  8. Do they provide tools to address suitability questions and client risk profile assessments?
  9. Do they have value-add materials to help in client education?
  10. Are they committed to customer service and problem resolution for both advisors and clients?
Given the constraints associated with running a business, it may well be impossible for an advisor to replicate the specialized expertise and the time and attention third-party active asset managers can devote to client portfolio management. It is a given that the right asset managers will provide a high degree of sophisticated portfolio management. But there is one factor that is not always top of mind—they will likely save a financial advisor valuable time that can better be used to focus on growing their client base and assets under management, and to provide the advice, services, and face-to-face attention today’s clients demand.

In the end, after all, time is money.

What are the benefits of working with third-party asset managers?
Andrew Paladino • Timonium, MD
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“As we evaluate third-party managers, I am very focused on how their strategies performed during down market years. For example, how long did it take their strategies to recover from the bear market of 2007 to 2009? I explain to clients that the compounding of returns can work strongly in their favor over time if they are able to mitigate risk in those very volatile market downturns.”
Karen DeRose • Chicago, IL
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“On the equity side, I determined a long time ago that I am not an expert on actual portfolio management, nor do I have the time or desire to be one. That is where our selection of third-party money managers becomes an important element of the overall investment-planning process and in managing investment risk. They are the experts whose sole responsibility is managing client money. They have the resources, staff, and models to do this effectively.”
Alex Zourides • Melville, NY
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“For the vast majority of my clients, I use some aspect of active money management. I believe there are several benefits to this. First, client portfolios are being managed by professionals who have this as their sole responsibility. They have the brainpower, the staff, and the systems in place to do this task. Second, there is the inherent flexibility with managed accounts to make portfolio adjustments as the market environment changes.”
Janice Hammond • Burien, WA
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“If the client is interested in having some part of their investment plan managed by outside professionals, there is a cost associated with that. The managers invest their time and staff in strategy development and a commitment to managing strategies on a continual basis. But there are also the very real benefits from actively managed strategies. These strategies serve clients well both in performance over the long run and the concept of trying to reduce emotion around one’s investments.”
The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

This article, originally titled “Experts need experts,” first published in Proactive Advisor Magazine on June 18, 2015, Volume 6, Issue 11. The content and title have been revised and updated. David Wismer contributed to this article.

Kellye Whitney is founder and chief creative officer at Kellye Media & Associates. She was previously associate editorial director at Human Capital Media. She has specific expertise in human resources, diversity practices, and workforce learning and development programs. Her work has received several distinguished media awards.

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