In recent years, turnkey asset management programs, or what most today refer to as TAMPs, and their respective managers are finding it more and more challenging to win placement on broker/dealer platforms catering to dually registered advisors. The reasons for this are clear.
For one, the Department of Labor’s effort to impose a fiduciary standard on retirement account advice caused many firms to prune their offerings and settle on only a few trusted providers. In the wake of the DOL disruption, most b/ds are less than eager to add new offerings, preferring instead to take some time to catch their breath after years of dealing with one regulatory headache after another.
Secondly, consolidation among large firms continues, with LPL Financial snatching up NPH in late 2017, which set off a flurry of recruiting activity at the margins. Now, rumors persist that Cetera Financial Group is on the block and will change hands before the year is out. In this environment, everyone else is in a wait-and-see mode, loathing to make any moves until the uncertainty over the industry wanes.
Lastly, getting on these platforms is very much a pay-to-play endeavor. While it’s always been this way, it’s even more so now, which is somewhat troubling given that firms are asking TAMPs to write checks to cover their own due diligence costs. Aside from being a barrier to entry, it’s also a massive conflict of interest, resembling the pre-financial crisis practice of rating agencies signing off on toxic mortgage-backed securities, even though they were paid handsomely by the very companies that packaged those products together.
For dually registered advisors, the fallout has been a declining number of asset management options, the quality of which in some cases could be suspect. Not only has it led to an erosion of the client experience but it raises advisors’ cost structure, making it more difficult to compete with larger registered investment advisor firms that have more flexibility to pair offerings to the needs of their clients. In a world where margin compression is buffeting advisors from all sides, this is not a welcome trend.
For many, the answer is not as simple as relinquishing their dual registrations and going RIA-only. Many, if not most, dual registrants have clients with legacy, commission-based products in their portfolios that serve unique needs. No longer having access to such products would be detrimental to the client, while the loss of those trailing revenues for advisors would be devastating to their business.
Then, there are the obvious concerns about scale. Many advisors have neither the time nor the resources—or in some cases, the inclination—to build a world-class, stand-alone asset management firm. Thus, they stay on their existing platforms and leverage the business support infrastructure provided by their b/d.
So what ends up happening is that dually registered advisors, presented with a limited number of asset management options by their b/d, sometimes pay as much as 120 basis points per account—despite the fact that other offerings could do the same thing for a fraction of the price. This is not good for the industry, nor is it sustainable.
So what’s the solution? The simplest answer would be for b/ds to make their platforms more accessible. Though that is unlikely to happen anytime soon for the reasons mentioned above.
The most realistic (and practical) remedy is for dual registrants to work directly with third-party managers—not by outsourcing CFO functions completely, which could require quibbling with their b/d over compliance and due diligence concerns, but by paying for independent investment research. This not only frees up time and simplifies the portfolio management process for advisors working under a rep as portfolio manager model but it’s more cost effective than a turnkey TAMP offering. As a result, advisors can both expand their margins and leverage the added bandwidth to focus on the client relationships that generate the most revenue—something that’s always a challenge when attempting to tackle the Rep as PM model all alone.
The fallout from the disruptions impacting the TAMP community is certainly presenting issues for many dually registered advisors. And the answer isn’t always going RIA-only. It can’t be. The solution has to be much simpler than that.
Greg Luken is the CEO of Luken Investment Analytics, a Nashville, Tenn.-based firm.