How to Create a Fiduciary Investment Process That Makes Sense for Your Business

Mar 30, 2017


Most advisors I meet today are focused on both planning and advice. They realize that clients view advice as truly valuable and have built great businesses around it. But as planning is still advisors’ main focus, they still do asset management – and frankly, most get compensated for their advice through asset management (think basis points). That is why I thought John Frownfelter’s last post Investment Management in a Fiduciary World was a great look at what all advisors are (or should be) doing with their asset management business – it’s what we’ll all have to provide to our clients in the future. But there are business ramifications to building out those processes – profitability and brand have to be considered, as does the financial risks of taking on employees or partners.

Why not business as usual?

Going back to our earliest DOL rule discussions, we suggested that one of the key aspects that will drive behavior of advisors in the future will be consumers’ demands. We suggested that once the general public, aided by the media and the government, start hearing that reps are not obligated to put their best interests first, BICs and disclosures won’t matter.

The fiduciary movement is out there now and not going away. Consumers are not going to care if you can explain away a conflict of interest (or show a BIC) – they will want confirmation that you are a fiduciary. And if you’re not, they will find someone who is.

The challenge is to provide a fiduciary investment process, but do it in a way that still makes sense for your business. As I see it, you have three options:

  1. Insource your investment process. This is what many advisors do now. This includes rep as portfolio manager, picking funds or managers on a platform or going direct to a fund company business.
  2. Outsource your process. Hire an outsourced chief investment officer (outsourced CIO). It’s basically using a 3rd party to manage assets (typically models), but calling it your process, under your brand.
  3. Delegate the process. Apply an existing process for your firm, but give up the perception of control, implementing models-based portfolios that follow a specific investment process.

In reading John’s post, one of my takeaways is that investment management is not a part-time job. Hiring an investment team, giving them the resources to fully execute their process and documenting everything will be critical. The quantitative and qualitative processes for manager selection, monitoring and even termination is too important to do alongside your other job(s). And, according to some recent studies, rep as portfolio manager performance puts even more regulatory and reputational risk on your business.

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Brand and control

While the investment process is important, so is your brand. The more resources and expenses you put toward your investment deliverables, the more likely you are to emphasize that aspect of your business (which only makes sense). So does that turn you from a planning-focused firm into an investment-focused firm? Are you trading in a highly valued service (advice) for a less valued and performance-driven commodity (investments)? What do you actually want to be known for?

And what about control? I think we all have to understand what control means. Control should mean controlling the process, not the actual day-to-day work. As John mentioned, most advisors are no longer in the business of making buys and sells on individual securities; we rely on mangers to do that (in funds, separate accounts or event index funds and ETFs). What control do most firms have, other than looking at past performance or reading manger summaries? To me, control is the ability to terminate a manager – how many firms can terminate their own investment team for lack of performance or process?

Adding it all up

When it comes down to it, building a fiduciary investment process for your firm takes time, money and focus. The infrastructure costs for the insource model are probably out of reach for many firms and the risk is high, even for ones that have the infrastructure in place. Outsourcing can make sense for more investment-focused firms – but for planning firms, what does it do to your brand and reputation and how do you fire yourself? Lastly, while delegators lose the ability to “go down the hall and talk to the investment team,” they gain the ability to delegate the process that John outlined so eloquently in his post.

The fiduciary movement is here to stay; how you choose to implement the fiduciary investment process is completely up to you. But be aware of the challenges of your choices. What is the best process for your client, then what is the best process for you?


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John Anderson

John Anderson

John Anderson is the creator and lead author of Practically Speaking blog and Managing Director of Practice Management Solutions for the SEI Advisor Network.

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