SEC’s New Reg BI Care Standard Challenges Asset Management Platforms
Firms that offer turnkey asset management programs (TAMPs) to independent brokers outsourcing investment management could be pressured by the Securities and Exchange Commission’s new Regulation Best Interest standard, some TAMP executives said this week.
Some investor advocates and registered investment advisors who are subject to higher customer care standards than brokers have criticized Reg BI as weak, arguing that brokers can comply largely by simply disclosing conflicts of interest in documents that few investors read.
TAMPs, whose primary customers are financial planners and independent brokers, say Reg BI will pressure brokerage firms to choose their third-party firms on a much more qualitative basis geared to customer value than currently.
“It will be very difficult for those broker-dealers that are compensating advisors for one platform versus another to continue to do that,” AssetMark Financial Holdings Chief Executive Charles Goldman told analysts after the company reported a 24.5% jump in first-quarter revenue and a 39.2% rise in adjusted net income.
“I think it’s pretty clear that most broker-dealers are going to eliminate those kinds of practices,” he said in a follow-up interview with AdvisorHub.
TAMPs and other third-party providers are inherently challenged by Reg BI’s strictures, which require brokerage firms to calculate and document the reasons for recommending one investment or investment platform over another, industry consultants said.
“If you bring in a third party, you bring in another person to get paid,” said Scott Smith, director of advice relationships at Cerulli Associates, which consults with asset managers on distribution of their funds. “It may be incrementally more expensive, and you have to make sure that the merits are strong enough to warrant the extra cost.”
The key is for the smaller broker-dealers that are TAMP customers to marshall evidence showing that their internal investment platforms are not as strong as what they can get from outsiders such as AssetMark, Envestnet, SEI, Orion, and Riskalyze, Smith said.
AssetMark’s Goldman, a former head of Charles Schwab’s custody business for registered investment advisers, said he welcomes the more rigorous customer-care standard.
“That is a good thing,” he said. “It means that we’ll have to compete on the merits, the quality and the economic experience for the end investor as opposed to paying the advisor.”
TAMPs can help their brokerage customers marshall evidence of the value of a well-rounded platform that integrates asset management with other financial planning and administrative functions, said consultant Greg O’Gara, a senior research analyst at Aite Group’s wealth management practice.
“If the TAMP is part of a broader centralized broker-dealer platform itself, it is a valuable tool for advisors and broker-dealers to help them manage through Reg BI,” O’Gara said. “A platform that allows for better integration of advisory tools, and a centralized overlay for compliance and regulatory technology, is going to be the preference.”
The coronavirus crisis that has forced advisors to shelter at home and introduced extraordinary market volatility may paradoxically help TAMPs attract more business, according to some executives.
“Independent advisory firms won’t go into a remote environment without all the infrastructure to connect and collaborate in a way that larger companies can,” Bill Crager, chief executive of Envestnet said Thursday after the company reported a 61% jump in first-quarter adjusted net income to $31.2 million on revenue that rose 23% to $246.5 million.
Envestnet, the largest TAMP with $185 billion of assets under management, recently launched a venture with Dynasty Financial Partners, which contracts with RIAs to provide a range of practice management, trading and financing services. (Envestnet also took a minority stake in Dynasty).
“I think there’ll be more and more outsourcing to things like finance support, marketing support, compliance support, and other services that we’re driving around our advisory services exchange,” Crager told analysts.
Shares of Envestnet, which are down 4.3% this year, were up 8.6% in afternoon trading on Friday.
Shares of AssetMark, the third largest TAMP with $56 billion of assets under management as of March 31, are down about 15.6% year-to-date. They inched up 0.52% in afternoon trading on Friday.