‘Client-centric’ planning pays off

DETROIT — Financial advisory firms that concentrate on holistic planning and leave the investment management to outside professionals are seeing the benefits in real dollar terms, according to a recent study. Details of the comprehensive research project, which won’t be released publicly for at least a month but was obtained by InvestmentNews, showed that owners of advisory firms that oversaw between $5 million and $49 million averaged $91,908 in pretax income when the assets were managed in-house. That compares with a pretax income of $99,480 when the asset management services were outsourced. On the other end of the spectrum, investment-centric firms with more than $250 million under supervision averaged $394,002 in pretax income, while the client-centric model firms averaged $565,428, according to the findings. The income data were based on 2006 revenue figures and were one component of a research project that was commissioned by Brinker Capital Inc. of Berwyn, Pa. The research was designed to settle the long-running debate over asset-gathering versus asset-managing business models. “It turns out the client-centric model is not only a good way to start a practice, it’s a wonderful way to grow a practice,” said Dan Inveen, a manager at Seattle-based Moss Adams LLP who headed up the research, which included interviews with more than 900 advisory firms and more than 2,000 individual investors.
“I learned that in order to do the proper job, it’s great to have partners that specialize in the investment piece,” said Karen DeRose, a Chicago-based planner with Lincoln Financial Advisors Corp. in Hartford, Conn. Ms. DeRose, who oversees $105 million in client assets, said she will always monitor the investment management, but she feels that her time is better spent working with clients. “I think the industry as a whole is moving in this direction, because as your practice grows, you realize you can no longer do all things,” Ms. DeRose added. Justifying fees According to the Moss Adams research, more than 90% of advisory firms have less than $400 million under management. And of those firms, about half outsource investment management. “A lot of times, the investment-centric advisers feel they need to manage the investments themselves in order to justify the fees they’re charging,” Mr. Inveen said. According to the research, 81% of investors surveyed said they wanted financial advice on more than just investments, and 65% of investors said they wanted advisers to use outside money management. In fact, just 19% of investors said they wanted only investment management help from those advisers. Outsourcing investment management is rarely considered by Robert Levitt, president of Boca Raton, Fla.-based Levitt Capital Management LLC, which has $450 million under management. “As a wealth manager, we control asset allocation and money management because we don’t want any calendar year losses,” said Mr. Levitt, who recently opened an office in Paris to expand his business globally. For many advisers, however, the migration toward outsourcing has been driven by a growing need to provide more non-investment-related advice and services. “We have over the past few years migrated toward jobbing out the investment management,” said Clinton Struthers, president of Midland, Mich.-based Struthers Financial Services, a firm that oversees $100 million for clients. “I think it’s a little foolish of me to think I can outthink and out-maneuver the people who do investment management all day long.” According to Mr. Inveen, it is only when firms get beyond the $400 million mark that in-house investment management starts to make sense, due primarily to resources and economies of scale. The trend toward outsourcing has driven Biondo Investment Advisors LLC in Milford, Pa., over the past 18 months to focus on offering investment management to financial advisory firms. Of the firm’s $450 million under management, 20% is managed on a subadvisory basis for other advisers. Within five years, according to senior portfolio manager Joseph Biondo Jr., the goal is for the subadvisory business to represent 80% of the assets. “We have fairly grand visions for our business and for this trend that we think will continue,” he said. Brinker Capital, a firm that oversees $9 billion across multiple platforms geared toward helping advisers outsource their asset management operations, is among those likely to benefit from the outsourcing trend. That fact, however, doesn’t diminish the findings from the independent research, according to Charles Widger, Brinker’s chief executive. “This research makes the case that outsourcing is a trend and that it makes sense,” he said. “And it’s also true that we’re acting in our own self interest [by commissioning the research], but that doesn’t mean the findings are wrong.” The research was originally commissioned to help kick off a new consulting and practice-management initiative, according to Mr. Widger. “We thought the advisers were somewhat confused as to what the market wanted from them,” he said. “I’ve always been struck by the fact many advisers think they need to do the investment management themselves in order for clients to see them as valuable.”