Introduction

Turnkey Asset Management Platforms (TAMPs) are evolving marketplaces for large advisor tech platforms with a shopping mall of proprietary investment management choices and asset manager programs.  Advisors benefit by having all advisor portfolio management tools and products in a single place.  As the advisor marketplace has boomed in the last decade, so has the usage of TAMPs .  At the end of 2019, TAMPs officially served 4.5 million clients and $3.9 trillion in assets under management and administration.  Today, it’s over $12.7 trillion AUA/M.

Over the last decade, the TAMP market evolved into 2 basic types:

1. Product TAMPs offering proprietary investment strategies
2. Platform TAMPs offering investment products and third-party strategies delivered via proprietary software.

Now, the TAMP market has further bifurcated into two segments: very large TAMPs and everyone else.

Before the pandemic, all variations of TAMPs were experiencing growth driven by the macro trend toward outsourcing portfolio trading for advisors. Independent and self-directed channels continued to gain share with the migration of financial advisors from wirehouses to more independent, fee-based advisory models.  Shifts in the financial markets have led to increasing market consolidation and fee compression.  At the same time, the emergence of model hubs, financial planning, tax alpha, digital front ends and modern tech stacks is fueling new entrants while applying pressure on firms without the resources to keep pace.  Failing to adapt and simply offering a cornucopia of SMAs and ETFs is a path to extinction.

Here, experts from Natixis, Lockwood, Brinker and Envestnet weigh in on the current and future state of TAMPs and the ongoing evolution of the wealth management industry.

A Shift Towards ETF Strategists

As President and Portfolio Manager with Managed Portfolio Advisors, a division of Natixis, Curt Overway is no stranger to changes in the TAMP space. Overway reported an increase in trading brought on by the pandemic but a broader trend they are seeing is a shift away from SMAs to third-party strategists.

Natixis offers a number of these models through Envestnet’s manager portal, which offers the largest selection of models in the industry. Business is also picking up with wirehouses as Merrill Lynch and Morgan Stanley increasingly place assets into low-cost models. According to Overway, a lot of TAMPs are looking to get more of those strategist models on their platforms, particularly small start-up players.

Overway explained that Natixis works with Envestnet not only because they are the largest model distributor, but their wide range of SMA managers provide more flexibility for advisors when building portfolios. The market has shifted in the past ten years towards large asset managers offering ETF strategies populated exclusively with proprietary ETFs without a manager fee, since they can live off the revenue from the expenses of the underlying securities, he said.

Since managed ETF strategies are available a significantly reduced cost, many firms are shifting actively managed assets over to reduce clients’ bills. Morgan Stanley, which has billions of dollars of assets on the brokerage side, has been moving accounts over to managed strategies from American Funds. This enables the broker to create a non-taxable event for clients by converting assets from a front-loaded share class over to a no-load share class on the advisory side.

More Advisors Are Switching to UMAs

The demand for managed accounts is growing rapidly. Cerulli projects assets in unified managed accounts (UMAs) will nearly double by 2022 to an estimated $1.85 trillion, up from $994 billion in 2018.

According to Joel Hempel, Chief Operating Officer of Lockwood Advisors, more advisors are opening UMAs today through TAMPs.  According to Hempel, this is due to the ability of UMAs to drive efficiency for the home office since they enable management of thousands of accounts and support a wide range of investment types.

This is part of a long-term shift from manager traded SMAs to model delivered SMAs, where the sponsor firms have control over trading. As trading centralizes at sponsor firms, more pressure is being placed on trading infrastructure to maintain their quantitative edge.  Order management systems are a key component, ensuring that when models are updated and trading signals are sent out, that the implementation of portfolio changes is fast and efficient.

Curt Overway of Natixis noted that their clients have also been expanding their UMA programs as they work to centralize discretion with their home offices and pull back trading discretion from advisors.  Operational efficiency and scalability are key features of UMA, which help enterprise wealth firms transfer the time that advisors are spending on investment management into more holistic financial advisory services.

The UMA is the most complex program that a wealth management technology platform can support since it requires multiple layers of functionality to operate seamlessly.  This includes sleeves, model management, portfolio construction, portfolio rebalancing, order generation, block trading, order management and allocation management.  Integrated accounting and trading technology must automatically handle the operational aspects such as scheduled deposits and withdrawals, corporate actions and tax management with minimal human interaction required.  This promotes scalability and reduces the operational risk from manual errors.

TAMP Mergers & Acquisitions

It was a savvy move for Orion Advisor Tech to acquire Brinker Capital this year, one of the few remaining large, independent product focused TAMPs.  Brinker is well known for their proprietary strategies and had grown to over $25 billion in assets by the beginning of 2020, making them a tempting target for Orion who clearly wanted into the TAMP market.

The Orion-Brinker tie-up follows a string of TAMP acquisitions, some by wealth technology players including Vestmark buying Adhesion Wealth, Focus Financial buying Loring Ward and Orion snapping up FTJ Fundchoice.  Of course, Envestnet, the largest TAMP by AUM, has made a number of acquisitions to increase their market reach, including Foliodynamix and Fundquest.   But Envestnet was buying for scale while Vestmark and Orion were buying their way into the TAMP market which has become the new table stakes for competing for enterprise wealth firms.

Before the Orion merger, Brinker CEO Noreen Beaman said the company was limited in terms of reaching smaller accounts. Now, business is soaring, with record growth rates in 2020. Beaman chalks up this success to two things: awareness and opportunity. Brinker identified the high net worth client segment as an emerging segment and put together a set of product offerings to target this group.

The first offering Brinker launched for serving emerging HNW clients was a UMA, noted Noreen Beaman, CEO of Brinker. It includes a service layer allowing financial advisors to really “dig in,” as Beaman says. The system assigns a CFA to each advisor to support their book of business, provide portfolio insights, and deliver a high-touch, white glove experience to clients.

Paying close attention to demographic trends in the wealth market and using them to create awareness and opportunity has served Brinker well up until now. However, they’re watching other trends on the horizon.  As election approached, Beaman explained that they are seeing more advisors diversifying by adding more active managers into their clients’ UMAs.

Serving the Recently Wealthy

Baby boomers rolling over their 401k plans, or monetizing small businesses before retirement, are the new entrants in the one to five-million-dollar net worth space. Beaman stated that financial advisors are looking for additional resources to support this demographic since they often require bespoke investment solutions. Firms need to create longevity of assets for the newly wealthy and advisors see partnerships with TAMPs, such as Brinker, as a reliable outsourced option.

HNW and UHNW clients also have more complex investment needs, which increases the complexity of risk management for portfolio construction and ongoing maintenance. Earlier this year, Brinker tapped into the risk management capabilities of BlackRock’s Aladdin Wealth platform.  Aladdin Wealth will provide risk insights that drive modeling, providing for a more thorough analysis of every multiple “what if” scenario across an advisor’s book of business. These metrics help Brinker by allowing them to scale business, and they help the advisor by giving them all the right information to keep a client on the hook.

Tying Brinker up with Aladdin marries one of the best technologies to provide a personalized experience, not customized, Beaman emphasized, since customization isn’t as scalable.

TAMPs Aren’t All or Nothing

It is important to keep in mind that TAMPs are not an all or nothing solution, Hempel noted.  Lockwood offers advisors a wide range of outsourced services through their Managed360 platform including their own actively-managed portfolios, third-party strategists, institutional-quality research as well as an end-to-end technology solution via NetX360. More advisors are carving out combinations of services to fill gaps in their current offerings or replace higher cost internal services.

Hempel believes TAMPs should expect more business from financial advisors as COVID and associated volatility pushes advisory firms to increase scale and improve automation. This is driven by advisors seeing increased demand for their services from investors concerned about the financial fallout of COVID-19. New clients are looking to build savings in preparation for future emergencies and the CARES Act made changes to rules for investment vehicles such as 410(k)s that enable people to tap their retirement accounts to cover short-term expenses.

Advisors are being asked to do more with their clients, Hempel asserted when discussing TAMP trends. They need to cast a wider net to investors with lower minimums, and this involves outsourcing investment management.

More than 71% of SEC-registered RIAs have less than $1 billion in AUM yet they manage around 3% of total RIA assets.  These firms have smaller median account sizes with low minimums, which increases their operational overhead and increases the need to scale up their trading operations in order to keep per account costs low.

The most profitable firms encode their trade operations in software to drive scale.  They have robust trade automation and order management technology to service smaller accounts so that they are accretive to their bottom line, rather than a drain on profits.

One-Dimensional TAMPs

When it came to talking about TAMPs, Envestnet’s Andrew Stavaridis did not hold back. According to Stavaridis, traditional TAMPs are dead, or at least, they’ve become one-dimensional. They need to progress past simply selling asset management or they’ll continue to decline. The key is to add more services.

Stavaridis is seeing advisors becoming financial planners, gathering more assets, and thinking of new ways to address a client’s financial wellness. An advisor today cannot be successful if they’re thinking linearly and simply talking to clients about piecemeal products they want to push. TAMPs need to keep in mind that firms want a single provider that has access to both products and solutions.

This is why Envestnet is looking at how advisors are working with clients on their true goals. What are this particular client’s goals for themselves, their family, or their retirement? As a result of gleaning the complete picture, Envestnet’s experts can recommend solutions and products that the client would want. Envestnet houses 130 fund strategists and TAMPs that can be accessed through their platform. Stavaridis’s view is that, in order to acquire more assets under management, TAMPs need more gateways for advisors including integrated financial planning, insurance, data aggregation and more.

TAMPs also need the right trading technology to expand beyond simple large, mid and small cap strategies and support more complex SMA strategies that include options such as long/short or beta neutral.  Order management software that can handle multiple asset classes simultaneously including options and bonds is becoming increasingly important,

Stavaridis emphasized the holistic approach, since institutions want to engage across a full tech stack. Having every capability from account opening to workflow processing in a single end-to-end platform is more important than ever at an institutional level. In response, larger institutions are working towards multi-account opening within the same platform, streamlining the system so advisors aren’t forced to maneuver out of different systems.

Conclusion

So, what does the future hold for TAMPs?  Will they be relegated to acting as money management hotels, as Beaman suggests, or will they continue to increase market share by offering a wider range of outsourced services that keep advisors from shifting assets whenever the wind blows?  Will more assets be switched into low-cost ETF strategies as fee compression continues or can TAMPs innovate and provide enough value to keep advisors as a result of the added value of their extensive platforms, proprietary models and SMAs?

The big picture is clear as the ongoing expansion of the TAMP marketplace is well supported by powerful tailwinds and the underlying forces are not abating.  The independent wealth management channel will continue to expand, UMA assets will continue to grow, the home office will deliver more investment and portfolio trading services for advisors, and the role of the advisor as a mini asset manager will continue to expand, all to the benefit of TAMPs.

TAMPs have now become the new table stakes for competing enterprise wealth firms.  As TAMP competition heats up, fee compression increases with larger firms applying more pressure on smaller firms and simultaneously protecting their dominant position by adding new services.  Additional TAMP offerings may include integrated financial planning, insurance products, more tax alpha, more asset classes to mitigate risk, and better home office portfolio trading tools across all asset classes, all to the benefit of the larger TAMPs.

Some TAMPs may choose to control advisor costs by unbundling features into optional advisor add-on apps.   New and innovative third-party add-on services may be offered as TAMP competition increases.   The evolution of TAMP app stores offering advisor apps and an online mall of proprietary investment choices alongside money manager shops may be attractive to advisor firms.

The increased competition and fee pressure will continue to trend to more mergers and acquisitions, with the medium and smaller sized TAMPs consolidating or being acquired by larger firms.  Simultaneously, niche third party vendors will continue to innovate new services, hoping to bolt on to larger TAMPs.

Two things are apparent.  The larger TAMPs are winning and there is no standing still.   The mandate is clear: adapt or die.