Why some advisors refuse to outsource investment management

The trend to outsource portfolio management has grown almost perfectly in tandem with growing access to various model portfolios and turnkey wealth management platforms, with financial advisors essentially handing over the keys to attract new clients and new clients. You can focus on other things, such as developing assets. .

Despite the fact that most financial advisors charge fees pegged to the client’s assets, the need to outsource portfolio management is stronger than ever. As the investment management part of financial planning is becoming commoditized, low cost, and easily accessible to the simple mix of mutual his funds and his ETFs, for many advisors, it’s time to take over that part of the job. It makes sense.

And in most cases, clients don’t know or care about the difference, as long as the portfolio stays within the acceptable range.

Against this backdrop, the question arises as to why some advisors resist this trend and insist on spending time and resources managing funds in-house.

Ryan Johnson, Managing Director of Buckingham Advisors, a $725 million investment advisory firm, said:

Like most RIAs that manage client portfolios in-house, Buckingham’s interest in individual securities is largely limited to the equity side of client portfolios.

On the fixed income side, mutual funds and ETFs are more efficient. Buckingham builds a portfolio of individual bonds for households over $3 million.

However, clients who have allocated $100,000 or more to stocks can benefit from individual stock selection for Buckingham’s Large Cap allocations. Buckingham still relies on his ETFs for investing in small-cap, mid-cap, and international stocks.

That’s right, Buckingham uses precious resources to squeeze profits into clients in the world’s most liquid and analyzed asset classes.

“I know it’s unusual to say we’re adding value to large-cap stocks, but I feel like I have a lot more control over individual stock selection, especially when it comes to tax planning,” Johnson said. rice field.

The first reason advisors mention in-house investment management is not necessarily tax management, but mainly because in-house portfolios tend to be more concentrated and have lower turnover than portfolios on outsourced platforms. This is part of a recurring theme.

At RIA Blue Chip Partners, the equity portion of the company’s $1.1 billion under management is managed in-house in individual stocks, with a portfolio of 25-40 stocks and an average portfolio turnover of 20% less than

“We found the sweet spot to be between 25 and 40 stocks, a level borne out by historical data,” said Daniel Dusina, investment director at Blue Chip.

By making the portfolio more concentrated, Dusina says, “high-conviction ideas are valued, but you can still diversify.”

Blue Chip chief executive Robert Steinberg said the company’s portfolio of more than 700 households is similar, but customers are more involved when they look at the individual companies they own.

“Everyone gets the same model, but with different equity weightings,” he said. “Clients are more involved, tax losses are easier to harvest, and they know what they own.”

Steinberg acknowledged the effort to manage the money internally, but said it was part of the value proposition the company was pushing.

“It’s more work and most companies aren’t willing to make that investment, but it’s a differentiator and clients understand that,” he said. We’re working hard.They’re not just talking about plans, they’re talking about stocks.”

2020 Research Report from InvestmentNews They cite many reasons to outsource their wealth management duties to external providers, with freed-up time, access to institutional-level capabilities, and access to strategies beyond the advisor’s expertise top the list.

While these are all valid reasons for outsourcing, some advisors still view portfolio management as a core component of financial planning.

of investment news The report also listed the top reasons for not using external services for portfolio management, ranking investment research strength, flexibility, and cost.

Most RIAs do not adjust fees to compensate clients for underlying fees related to outsourced portfolio management or fund expense ratios. Therefore, it is generally safe to assume that customers are paying less total fees in a company where wealth management is done in-house, even if the sum is only a few basis points.

“Every time you stack financial instruments, the cost to clients increases,” said Paul Schatz, president of Heritage Capital, a $110 million RIA that builds client portfolios using stocks, bonds, ETFs and mutual funds. must be.

Like many advisors building client portfolios from scratch, Schatz says, “Control is a big driver.”

“For better or worse, I have always wanted to have full control over our net exposure, which is not possible when outsourcing,” he said. “I am very focused on the market and it would be difficult to be in a fully risk-on or fully leveraged model with a negative view.”

With 34 years of experience in the financial services industry, Mr. Schatz recognizes the uniqueness of resisting the temptation to outsource wealth management and helps clients understand where they stand.

“In the first couple of meetings with new clients, we repeatedly say that we manage our own portfolio,” he said. “Outsourcing has exploded in the last 10-15 years, but I never really took it seriously. I don’t trust anyone to do as much for my clients as I do.TAMP has commoditized wealth management to a few basis points and it’s not for me.

HCR Wealth Advisors Chief Investment Officer Jordan Kahn understands the appeal of outsourcing for advisory firms, but not the long-term value for clients.

“In my opinion [outsourcing is about] Ease of managing end advisors,” he said. “The average advisor focuses on fitting clients into these models and going out to get more clients.”

Kahn estimates that up to 40% of HCR’s $1.4 billion in client assets are managed in portfolios of individual stocks.

“We believe a portfolio of individual stocks is best for our clients,” he said. “With most outsourcing, they tend to keep closet index portfolios containing hundreds of stocks. Our portfolio consists of the 20 to 25 best ideas.”

Kahn said HCR often leads with individual stock portfolios when meeting prospective clients.

“We expect more investment advisors to come to our office as they use funds and ETFs, but they still like the idea of ​​owning individual stocks,” he said. rice field. “That’s all my background. I started out as a stock analyst, a stock picker. It’s in my blood and it’s not an extra job for me. are expected to increase and model their clients.”

With the continued commoditization of investment management, most advisors managing proprietary portfolios are a major part of the conversation with prospective clients.

Matt Wilson, President and Chief Financial Officer of Keen Wealth Advisors, said: “Mutual funds and ETFs increase costs, and the way portfolios are managed results in lower internal expense ratios.”

About 70% of RIA’s $755 million under management is in equities, half of which is in individual stock portfolios.

“We want to manage these portfolios in a tax efficient way that is customized for our clients,” said Wilson. “Where I’m from, Wirehouse, used third-party money managers a lot.”

Asset management was moved in-house when Wilson left Wells Fargo in 2014 to join an independent advisory group.

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