I’m not sure how many advisors heeded my warning, but the SEC is all over this issue now. The commission’s proposed rule covers not just outsourcing to TAMPs, but a wide variety of outsourcing activities that might affect an advisor’s delivery of financial advice to clients.
The SEC is not fooling around. They believe, and probably with some justification, that many advisors have been lax in doing their due diligence on the outsourced service providers they use. Rather than issuing a warning or a Risk Alert telling advisors to consider their fiduciary responsibilities when outsourcing, the proposed rule would mandate how that should be done.
The SEC wants advisors to:
Have processes and procedures in place to organize and manage due diligence activities;
Perform a thorough due diligence examination before hiring a covered service provider;
Monitor the selection on an ongoing basis to ensure it continues to benefit clients; and
Keep books and records to document and justify the process.
Whether you agree with the SEC’s approach or not, the message is clear. Selecting a TAMP is like selecting any other investment for your clients’ portfolios. You’ve got to do your due diligence and put processes and procedures in place to make sure your selection is in your clients’ best interests. And you’ve got to document and justify your choice.
If you’ve been sticking with your current TAMP because you’re a member of their “Old Timers Club,” you like their wholesaler, their conferences are really fun or they help you with your marketing, guess what…You’re in trouble. None of those factors benefit your clients.
It’ll be a while before the proposed rule is finalized. But it’s not too early to get your house in order. Staying with your current TAMP because they’re old, big, or familiar won’t cut it. And you can’t justify your selection based on benefits you or your firm receive from the TAMP.
Instead, you should be looking at issues like:
TAMP fees on a relative and absolute basis;
Internal expenses of the portfolios;
Long-term portfolio performance;
Investment process and associated risks;
Experience, credentials, and skills of the firm’s personnel;
Use of proprietary products;
Conflicts of interest and hidden fees; and
Compliance record and other risk factors.
You have choices. Make sure you can defend your TAMP selection in terms that benefit your clients. If you can’t, move now before an SEC examiner knocks on your door.
The SEC doesn’t need to wait until the rule is finalized to raise this issue. TAMP selection has always been subject to your fiduciary duties.
If you weren’t paying attention before, you have no excuse now. Get on solid ground.
Scott MacKillop is CEO of First Ascent Asset Management, the first TAMP to provide outsourced investment management services to financial advisors and their clients on a flat-fee basis. He is an ambassador for the Institute for the Fiduciary Standard and a 45-year veteran of the financial services industry. He can be reached at [email protected]