Thinking is free. This is something I occasionally like to remind the entrepreneurs I work with when I begin to sense someone slipping into a mild (or not-so-mild) panic over the seemingly endless list of things to figure out and decisions to make when starting a business. After working with small business owners for over a decade, I am no stranger to the pressure so many people feel to get their ducks in a row, launch, and grow as quickly as possible.
One of the most common questions we hear from advisors interested in starting their own RIA is “What are my options for investment management?” I can tell you as a soon-to-be business school graduate that the general discourse in both academia and the start-up world is that there is no amount of research and planning that you can do to guarantee success. You just have to pull the trigger and make adjustments after each shot you take. I agree with this sentiment generally, but thinking about what services you do and do not want to offer clients and which custodian to work with are not decisions to trivialize when starting an RIA.
It is entirely possible (and not uncommon) to shift gears after launching your firm to alter your fee structure, develop a niche, change technology providers or custodians, switch to fully remote after having a physical office, or add and remove service offerings. However, these changes can be stressful, time-consuming, costly, and more challenging to implement later on down the line, especially when clients are impacted.
For these reasons, when I speak with advisors who are just starting out, I encourage them to really think about things like
Who do I want to serve?
What does my ideal client look like?
What kind of work do I enjoy doing?
What is my area of expertise?
What services are outside of my area of expertise or don’t I enjoy doing, but my ideal client might need?
What are my growth and earnings goals?
What is my vision for my life, and how can I build a business that supports that?
The answers to these questions should be some of the primary drivers behind your business model, and wealth management is a significant piece of the puzzle. You may decide to outsource it, handle it yourself, a combination of the two, or not offer any solution to your clients. But spend some time thinking about whether and how to offer investment management to increase the value you deliver to your clients. Regardless of the conclusion, you should feel confident that it is the right choice for you, your growing firm, and your target market.
Investment Management Options
Outsourced Asset Management
No name has been mentioned more in business school than management consultant, educator, and author Peter Drucker. One of my favorite concepts Drucker examines is the outsourced approach to management consulting and business operations, where he famously states, “Do what you do best, and outsource the rest.”
I could write a lot about the many ways in which appropriate outsourcing can level up your business and your life, but key to keep in mind is that the only thing that you should never outsource is your core competency. I think there is also an argument to be made for not outsourcing work that you love to do or that brings you enjoyment. My final point (for now) on outsourcing is that you should not outsource if the available outsourced solutions are inadequate or would diminish the value of the benefits received. Otherwise, it’s all fair game.
If investment management is a service you want to provide clients, but it doesn’t spark joy for you, here are the two primary outsourcing options to consider:
#1: Turnkey Asset Management Platform (TAMP)
TAMPs were created to allow financial advisors to outsource all of the work that goes into managing assets. A TAMP can be one of the easiest, most cost-effective ways to offer expert investment management services to your clients while also saving you considerable time, energy, and discontent if you are handling it yourself and would rather not be.
Most TAMPs provide standard services such as trading, rebalancing, reporting, billing, and a client portal. New technology-based TAMPs can also offer a better client onboarding experience than a traditional TAMP through digitized paperwork as well as an improved client portal. Some TAMPS, like XY Investment Solutions (XYIS), also deliver resources, training, and client-facing content. According to the 2022 T3 Inside Information Survey, satisfaction ratings among advisors are also rising for most TAMPS. This indicates that the biggest players are making significant improvements to their products and customers are noticing.
#2: Investment Management Firm
Partnering with another RIA that is passionate about and dedicated to investment management is another option to consider if you want to be able to tap into expert guidance without having to put in much leg work yourself. Niches are powerful, and this is especially true in the financial services space according to XYPN’s annual benchmarking study. Many advisors only want to handle financial planning or wealth management, but recognize that their clients may require both services. Establishing a relationship with an investment management firm whose values, service, and approach to investing reflect or enhance your brand can often improve your offering and help you grow your business. It also gives you the freedom to focus solely on the work that you do best and enjoy most.
DIY with a Traditional Custodian
#3: The “Hands-On” Approach
The majority of advisors choose to manage investments for their clients themselves through the use of one or more custodians and their tech stack. There are numerous benefits to this strategy, and it is favored by many who want moderate to high involvement in wealth management. This option may speak to you if you enjoy controlling an investment strategy. Others appreciate the increased value that it offers clients who relish a one-stop shop for both financial planning and asset management.
In short, this may be your happy place if you delight in providing investment-related services or desire a high degree of control over the assets you are managing.
When comparing custodians, it is important to research and inquire about more than just pricing. Learning about whether or not the technology meets your needs, what the onboarding experience consists of, what the service culture is like, if your tech stack can be sufficiently integrated, and what kind of client experience you can expect are key deliberations when contemplating which custodian(s) to work with. Although more relevant to large firms, in 2020 approximately 85% of the Financial Times Top 300 RIAs used two or more custodians. You may decide to open accounts with multiple custodians if there are specific advantages you are seeking for a particular type of client or investment strategy.
“The Big 3” - Large Custodians
Schwab is a popular choice among new and existing RIA owners. With over 30 years of experience, advisors can expect industry-leading services and technology. Historically, Schwab did have an AUM minimum, though it was much lower than Fidelity and Pershing. However, since Schwab’s acquisition of TD Ameritrade was announced, they have also declared that they are doing away with AUM minimums and will not charge any custody fees. This is a major win for advisors who are not starting out without millions under management. Schwab also offers more opportunities for futures, crypto, and international trading than its primary competitor, Fidelity. XYPN members also get access to discounts on specific mutual fund trades as well as a trained and dedicated onboarding team at Schwab.
Fidelity is another favorite among investors, mainly because of its retirement planning assistance and seamless connection to the advisor platform. Fidelity also boasts an impressive trading platform and client-friendly portal experience. However, Fidelity does have a minimum, which can make them inaccessible to advisors starting with no AUM.
Pershing/BNY Mellon rounds out “The Big 3” and works exclusively with SEC-registered firms that are usually both large and growth-oriented. They are a top pick among those working with ultra high net worth individuals due to their global banking capabilities. Customers are also generally pleased that Pershing does not seem to favor larger firms over smaller ones (relatively speaking).
New & Small Firm-Friendly Custodians
There are many lesser-known alternatives to Schwab, Fidelity, and Pershing, and each is uniquely positioned and differentiated. The most commonly utilized ones include:
Shareholders Service Group (SSG)
Equity Advisor Solutions
Axos Advisor Services
The advantages of these custodians typically include no or low asset minimums in addition to service, technology, and/or pricing that may be better suited for your firm. Bob Veres did an exceptional write-up on Nerd’s Eye View diving into the specifics, including benefits and disadvantages, of each of these new and small firm-friendly custodians. I highly recommend you check it out if you are interested in learning more.
Why Not Both?
#4: The Combination Approach
A less common but highly advantageous strategy for some advisors is to use a TAMP for certain clients and a more involved method for others. This TAMP+DIY combination approach can marry all of the benefits of both practices while simultaneously minimizing costs and maximizing desired results and efficiency. At XYIS, we actually spoke to two advisors in the last week alone who are interested in purchasing Orion through XYIS to take advantage of the steep discount offered to XYPN members while also utilizing the TAMP for clients that have fairly straightforward investment needs. Some may find this option to be more complex than its worth, but others will revel in the splendor of getting the best of both worlds.
Sometimes Less is More
#5: Not Offering Investment Management
Depending on how you build your business and who you are serving, it may actually make good sense for you not to offer investment management services at all. If you are working with clients that do not have a need for asset management because they do not have assets, like younger clients or recent graduates, it may be sufficient to leave this out of your business plan. You can also refer them to low-cost, self-managed investment services like what Vanguard offers.
Businesses that can meet multiple wants and needs of consumers can generate greater demand and value, but keeping things simple has its perks as well. You may choose not to offer investment services because you are more focused on other additional services you offer that you have expertise in, such as estate planning or tax preparation. Or you may choose not because you just don’t want to, and in case you need some validation let me tell you that that is totally acceptable. Which brings me to my final thought
Your Happiness Matters
I cannot help but notice that the happiest entrepreneurs I know, both personally and professionally, are the ones that honor their own wishes and vision for their life and business as much as possible. This is especially true when it goes against the norm or dares to reimagine what could be.
Creativity, innovation, and joy are often stifled by the expectations of others and the mental, emotional, and physical limitations that we place on ourselves. This is why I encourage advisors just starting out or at a crossroads to really think about what they want to achieve from owning an RIA, who they want to serve, and how investment management plays into those pursuits.
Starting a business is expensive, and change can be hard, but thinking is always free and can help us ensure our decisions are properly aligned with our goals.
About the Author
Sarah Orlando is the Sales & Onboarding Manager of XY Investment Solutions (XYIS), which provides turn-key investment management solutions for advisors ready to streamline their investment process. Sarah is passionate about business operations and entrepreneurship, and her favorite part about her job is connecting advisors with processes and technology that allow them to accomplish their goals and do better work. When she’s not tinkering with Orion or working on an MBA, Sarah enjoys hiking, going to live music, playing games, cooking, traveling, and hanging out with her dog, cat, rabbit, and husband.
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