Selecting a turnkey asset management provider (TAMP) to manage your clients’ assets is an investment decision. Thus, it triggers your fiduciary responsibilities to your clients.
The SEC made this relationship clear in a Risk Alert issued July 21, 2021. The commission also provided a roadmap for advisors to use in discharging their fiduciary duties to clients in selecting a TAMP.
Here is a summary of that roadmap and a few tips to help you navigate it.
A Simple Roadmap
The SEC identified three areas of focus in determining whether an advisor’s selection of a TAMP to manage a client’s assets is consistent with the advisor’s fiduciary duties.
- Is it in the client’s best interest? Does the advisor have a reasonable basis for believing the TAMP program is in the best interest of the client? The advisor must make this determination both at the time of initial selection and on an ongoing basis.
The basis for this belief must be documented. It is not enough to believe it in your heart. You must articulate the basis for the decision in writing.
The SEC identified two areas of particular interest—fees and trading activity. Fees should be reasonable and there should be no hidden costs. And the trading activity must be reasonable relative to the client’s objectives and the fees they are paying.
- Are the disclosures adequate? The client should be fully informed about the costs and nature of the program, and the relationships among the parties. Adequate disclosure should appear in both the client agreements and the relevant marketing materials.
Disclosure of all fees and expenses is important. There should also be disclosure of any conflicts of interest and/or affiliations among the parties. If the advisor is receiving benefits from the TAMP that don’t directly benefit the client, they must be disclosed.
Do the relevant agreements and marketing materials disclose who will be providing services to the client? Are the respective roles of the advisor and the TAMP clear?
- Are written policies and procedures in place? There should be policies and procedures in place for determining whether a TAMP program is in the best interests of the advisor’s clients. And the advisor must be able to demonstrate that the firm complied with them in reviewing the appropriateness of the TAMP program.
This means creating, documenting, and complying with a step-by-step due diligence process for reviewing TAMPs. It should mirror the processes and procedures in place for the selection and ongoing review of any investment that is held in a client portfolio.
How to Comply
There is no one right way to design your due diligence policies and procedures. But you might approach the task by dividing your process into two sections: (1) what information will you collect; and (2) what will you do with that information once you get it.
What to Collect. Here’s a list of topics you should ask about in doing your due diligence on a TAMP. Feel free to add your own items to the list.
- Overview and History. You should understand the firm’s mission, target market, history of growth, areas of specialty, lines of business, and notable accomplishments.
- Legal and Compliance. Collect the firm’s regulatory documents such as their Form ADV and ask about any past or ongoing legal proceedings or compliance issues.
- Policies and Procedures. Confirm that the firm has a code of ethics, business continuity/disaster recovery plan, and cybersecurity plan.
- Ownership Structure. Determine the firm’s ownership structure. Learn what other firms are affiliated with the TAMP and find out who has voting control.
- Personnel. Collect information about the firm’s executive leadership, investment committee, portfolio managers, and those who will interact directly with your firm.
- Investment Products. Learn about the TAMPs investment philosophy, process, performance, risk characteristics, expense ratios, and account minimums.
- Ancillary Services. What services are offered besides asset management? Billing, performance reporting, risk profiling, tax transition strategies, to name a few.
- Trading Policies. Ask about the firm’s trading practices related to best execution, rebalancing, tax loss harvesting, and accepting special instructions.
- Operational Infrastructure. Learn where client assets will be custodied and what technology will be used to open and manage accounts and service clients.
- Pricing. Collect information about all fees and expenses charged and who pays them. Look closely for hidden fees, expenses, and add-ons.
What to Do with It: There is one primary goal of the due diligence process—to make sure the selection of a TAMP to manage your clients’ assets is in the best interest of those clients. The focus is on the clients.
Therefore, in reviewing the information you collect about the TAMP, consider the following:
- Do the products and services offered fit the needs of your clients? Are there restrictions or limitations on the TAMP’s offering that might negatively impact your clients?
- Are the TAMP’s investment products structured and managed so they have a reasonable likelihood of helping your clients meet their long-term financial goals?
- Do the investment products offered, or the structure or history of the TAMP, involve undue risks that can be avoided, minimized, or should be disclosed to clients?
- Is the firm qualified to provide the products and services offered? Specifically, who is managing the money? Do they have the right experience, credentials, and track record?
- Has the firm demonstrated that they can produce results that will give your clients a reasonable likelihood of reaching their long-term financial goals?
- Are the products and services offered priced fairly given their expected value?
- Are there any conflicts of interest that might arise from working with the TAMP that can be avoided, mitigated, or should be disclosed to clients?
- Considering all the available information, do you feel you can trust the TAMP to act in the best interests of your clients?
A Few Tips to Consider
Selecting a TAMP is an investment decision. Focus on the nature and quality of the investment offering. The fact that a TAMP has wonderful technology, provides sales training, will redesign your website, offers marketing support, or has a great practice management program is not a relevant consideration, unless it directly benefits your clients.
In fact, if you or your firm receive benefits from the TAMP that do not directly benefit your clients, that will create a conflict of interest. That conflict may violate your fiduciary duties, or at least need to be disclosed prominently. Your client is paying the TAMP’s fee. Make sure their fees are not being used to buy services for you or your firm that don’t benefit them.
The fact that a TAMP has significant AUM or has been around for a very long time, alone, is not a reason to select the firm. You wouldn’t choose a mutual fund for your client’s portfolio because it was big or old. The same approach should apply to selecting a TAMP. The question should always be, “how do my clients benefit?”
In its Risk Alert, the SEC paid particular attention to fees and expenses. You should too. Fees and expenses, along with historical performance, are the most tangible, quantifiable aspects of a TAMP offering. You can’t rely on a TAMP to repeat its past performance, but your clients will certainly pay the fees and expenses. Make sure they are reasonable and justifiable.
What You Should Do
Here are recommendations to help you live up to your fiduciary duties in selecting a TAMP.
- Recognize that selecting a TAMP to manage your clients’ assets is an investment decision and must be made in the best interests of your clients.
- Create processes and procedures for performing due diligence on any TAMP you use or consider using to manage client assets.
- Document your compliance with your TAMP due diligence policies and procedures.
- Make sure your Form ADV, client agreements, and marketing materials are accurate and complete in disclosing all material facts, including conflicts of interest.
- Periodically revisit the due diligence process to make sure it is still in your clients’ best interests to have their assets managed by the TAMP.
- Imagine yourself explaining the relationship with your TAMP to an SEC examiner. If you feel uncomfortable, you should probably rethink the relationship.
The SEC Risk Alert was generated after an extensive examination by the SEC staff of advisors associated with wrap-fee programs, a specialized type of TAMP. But the principles underlying the Risk Alert apply equally to the selection of any TAMP.
If you don’t have the pieces in place to make sure your TAMP selection process is consistent with the roadmap laid out by the SEC, act now. Don’t wait until the SEC knocks on your door.
Scott MacKillop is CEO of First Ascent Asset Management, the first TAMP to provide investment management services to financial advisors and their clients on a flat-fee basis. He is an ambassador for the Institute for the Fiduciary Standard and a 45-year veteran of the financial services industry. He can be reached at [email protected].