Modernizing Investment Management
Most financial advisors provide investment management services to their clients, which requires significant resources in the areas of research, portfolio construction, portfolio maintenance, trading, billing, performance reporting, etc. The possible ways to deliver these services depends on the advisor’s affiliation with either a wirehouse, independent broker-dealer/RIA, or RIA aggregator. For example, an advisor with Merrill Lynch or Edward Jones will have an internal wrap program to handle the entire investment management process. On the other hand, advisors that are affiliated with an independent broker-dealer or have their own RIA don't typically have an internal option available. This means they must create their own asset management system or outsource the process (i.e. outsourcing to a TAMP such as Loring Ward, Envestnet, Symmetry, BAM, etc.). The methodology chosen by each advisor results in a measurable *total cost and performance outcome. * Total cost is a proprietary calculation that accounts for every penny that an investor pays for a portfolio to be managed. The diagram below illustrates the cost structure of the current system used by most advisors.
The current system is a complete train wreck with a staggering average total cost of 3.25%. There are too many cooks in the kitchen, creating too many layers of fees and expenses and it’s time for radical change! As an RIA owner with a fiduciary liability, I no longer felt comfortable with my client’s assets floating around in this nontransparent sea of fees, expenses, and confusion. We diligently searched for a solution and came up empty-handed. We evaluated every TAMP option and every other possible solution that came our way, and nothing made sense. We realized that our desired investment platform did not exist and if we wanted something radically different, we would have to create it ourselves, and so the journey began. This extremely complex and time-consuming project was the source of many grey hairs, but the outcome was a revolutionary investment management process that will pave the way to a new era for advisors and our clients. Our modernized process cuts the total cost in half, from 3.25% to 1.6%. The diagram below illustrates the cost structure of our modernized platform.
To accomplish this level of innovation we had to start from scratch and refine the entire investment management supply chain. This is a simple concept and is similar to the supply chain innovations implemented by Walmart in the 1980s (click here to read more about Walmart’s supply chain innovations). You will notice that the custodial expense (.10%) and the financial advisor expense (1%) are the same in both the old and modern models. The macro (model portfolio construction, i.e. TAMP) and micro (individual stock and bond selection, i.e. mutual funds or ETF’s) portfolio management functions needed radical innovation and that was our focal point. Through blood, sweat, and tears we figured out how to perform these functions at an average cost of .50% as opposed to the old system’s average cost of 2.15%. This cost reduction can now be passed down to all of our clients. The final step in this process was to make this modern investment methodology available to all financial advisors and bring meaningful change to the industry. We created three different models that would allow any advisor to implement this modern methodology within their practice.
1. The first model is a self-learning system for advisors that want to learn how to do all of this on their own (this is not an easy feat but it’s most definitely possible). This information is available to download from our public advisor portal at any time.
2. The second model is a consulting arrangement that allows advisors to pay a consultant to set up this modern methodology within their practice.
3. The third and final model is a full outsourcing solution that allows advisors to pay basis points in place of learning the system, purchasing software, paying employees for research and trading functions, etc. We have no preference for how this modernized process is implemented so long as advisors and investors can reap the benefits.
Click below to see this concept in action!