Choosing a turnkey asset management provider (TAMP) to manage your clients’ assets is an investment decision. Thus, it triggers your fiduciary responsibilities towards your customers.
The SEC clarified this connection in a risk alert issued on July 21, 2021. The Commission also provided a roadmap for consultants to use in selecting a TAMP for clients to discharge their fiduciary duties.
Here’s a summary of that roadmap and some tips to help you navigate it.
a simple roadmap
The SEC has identified three areas of focus in determining whether the selection of a TAMP advisor to manage a client’s assets is commensurate with the advisor’s fiduciary duties.
- Is it in the best interest of the customer? Does the Advisor have reasonable grounds to believe that the TAMP program is in the best interest of the client? The consultant should make this determination at the time of initial selection and on an ongoing basis.
The basis of this belief must be documented. It is not enough to believe it in your heart. You must explain the grounds for the decision in writing.
The SEC identified two areas of special 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 pay.
- Are the disclosures enough? The Client must be fully informed of the cost and nature of the Program, and of the relationship between the parties. Adequate disclosure must be visible in both client contracts and relevant marketing materials.
It is important to disclose all fees and expenses. Any conflict of interest and/or affiliation between the parties must also be disclosed. If the advisor is receiving benefits from TAMPs that do not directly benefit the client, they must be disclosed.
Do the relevant agreements and marketing materials reveal who will provide the services to the customer? Are the respective roles of consultant and TAMP clear?
- Are there written policies and procedures in place? There should be policies and procedures in place to determine whether the TAMP program is in the best interests of the consultant’s clients. And the consultant must be able to demonstrate that the firm has complied with them in its review of the suitability of the TAMP program.
This means creating, documenting and complying with a step-by-step due diligence process for reviewing TAMPs. This should reflect the processes and procedures in place for the selection and ongoing review of any investments placed in the client portfolio.
how to comply
There is no one right way to design your due diligence policies and procedures. But you can accomplish the task by dividing your process into two sections: (1) what information you will collect; and (2) what you will do after receiving that information.
what to collect, Here is a list of topics you should ask about to do your due diligence on TAMP. Feel free to add your own items to the list.
- Overview and History. You should understand the firm’s mission, target market, growth history, areas of specialty, lines of business, and notable achievements.
- Legal and Compliance. Collect the firm’s regulatory documents such as their Form ADV and inquire about any past or ongoing legal proceedings or compliance issues.
- Policies and procedures. Confirm that the firm has a code of conduct, business continuity/disaster recovery plan and cyber security plan.
- ownership structure. Determine the ownership structure of the firm. Learn what other firms are affiliated with TAMP and find out who has voting control.
- Staff. Gather information about the firm’s executive leadership, investment committee, portfolio managers, and people who will interact directly with your firm.
- investment product. Learn about TAMPs investment philosophy, process, performance, risk characteristics, expense ratio and account minimums.
- ancillary services. What services are provided other than asset management? Billing, performance reporting, risk profiling, tax transition strategies, to name a few.
- Trading Policies. Inquire about the firm’s business practices regarding best performance, rebalancing, tax loss accrual, and accepting special instructions.
- operational infrastructure. Know where client assets will be held 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. Watch closely for hidden fees, expenses and add-ons.
What to do with it: A primary goal of the due diligence process is to ensure that choosing TAMP to manage your clients’ assets is in those clients’ best interests. The focus is on customers.
Therefore, when reviewing the information you have collected about TAMP, consider the following:
- Are the products and services offered in line with the needs of your customers? Are there any restrictions or limitations on TAMP’s offering that could negatively affect your customers?
- Are TAMP’s investment products structured and managed so that they have a reasonable potential to help your clients meet their long-term financial goals?
- Does the structure or history of the proposed investment products, or TAMP, involve undue risks that can be avoided, mitigated, or disclosed to clients?
- Is the firm qualified to provide the offered products and services? Specifically, who is managing the money? Do they have the right experience, credentials and track record?
- Has the firm demonstrated that they can deliver results that will give your clients a reasonable likelihood of reaching their long-term financial goals?
- Are the prices of the products and services offered commensurate with their expected value?
- Are there any conflicts of interest arising from working with TAMP that can be avoided, minimized, or disclosed to clients?
- Considering all available information, do you think you can trust TAMP to act in the best interest of your customers?
some tips to consider
Choosing TAMP is an investment decision. Pay attention to the nature and quality of the investment offering. The fact that a TAMP has amazing technology, provides sales training, will redesign your website, provide marketing support, or have a great practice management program isn’t a relevant consideration, unless it’s directly to your customers. Do not benefit
In fact, if you or your firm receives benefits from TAMP that do not directly benefit your customers, this would create a conflict of interest. That conflict may violate your fiduciary duties, or at least need to be prominently disclosed. Your customer is paying the charges for TAMP. Make sure their fees are not being used to purchase services for you or your firm that do not benefit them.
The fact that a TAMP has a significant AUM or has been around for a very long time, alone, is not a reason to select the firm. You would not choose a mutual fund for your client’s portfolio because it was large or outdated. The same approach should apply for the selection of TAMPs. The question should always be, “How do my customers benefit?”
In its Risk Alert, the SEC paid special attention to fees and expenses. You too. Fees and expenses, along with historical performance, are the most tangible, quantifiable aspects of the TAMP offering. You can’t rely on TAMP to replicate your past performance, but your customers will certainly pay the fees and expenses. Make sure they are fair and equitable.
what should you do
Here are recommendations to help you fulfill your fiduciary duties in selecting TAMP.
- Recognize that choosing TAMP to manage your clients’ assets is an investment decision and must be made in the best interest of your clients.
- Create procedures and procedures to perform due diligence on any TAMPs you own or consider using to manage client assets.
- Document your compliance with your TAMP due diligence policies and procedures.
- Ensure that your Form ADV, Client Agreement and marketing materials are accurate and complete in disclosing all material facts, including conflicts of interest.
- Revisit the due diligence process from time to time to ensure that it is still in the best interest of your clients to have their assets managed by TAMP.
- Imagine you’re explaining the relationship with your TAMP to an SEC examiner. If you feel uncomfortable, you should probably reconsider the relationship.
The SEC Risk Alert wrap-fee program was created after an extensive investigation by SEC staff of advisors associated with a specific type of TAMP. But the underlying principles of Risk Warning apply equally to the selection of any TAMP.
If you don’t have the pieces to ensure that your TAMP selection process conforms to the roadmap set by the SEC, act now. Don’t wait until the SEC knocks on your door.
Scott McKillop 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 Trusted Standards Institute and a 45-year veteran of the financial services industry. he can be reached here [email protected],