The findings in this blog post come from our annual survey of over 1,350 registered investment adviser ("RIA") firms that was conducted in the first quarter of 2019. This proprietary RIA in a Box study is paired with publicly accessible data provided by the Securities and Exchange Commission ("SEC"). The goal of our annual study is to understand different options that comprise each firm characteristic, and to determine whether specific characteristics affect the growth, size, or operational efficiency of an RIA firm. The focus of this blog post is to explore outsourced portfolio management fees and and trends related to portfolio management outsourcing based on current and past survey data.
What Percentage of RIA Firms Outsource Portfolio Management to a TAMP?
It's generally been reported that in recent years an increasing number of RIA firms are choosing to outsource investment portfolio management rather than manage client portfolios in-house. RIA firms who outsource portfolio management primarily use a traditional turnkey asset management platforms ("TAMP") while more recently some are utilizing newer automated portfolio management platforms. According to our latest survey, the number of RIA firms presently outsourcing portfolio management is 21%.
Last year's survey revealed that 20% of RIA firms were outsourcing portfolio management. In recent years, we've observed a range of 18 to 21% of investment advisory firms utilizing an outsourced portfolio management solution such as a TAMP. We also continue to see firms that deploy a passive investment management style are generally more likely to consider a third-party investment management solution compared to advisory firms that use an exclusively active management style. As the industry continues to gradually shift to portfolios exclusively managed with a passive investment management style, it is possible we will see an uptick in the number of firms that outsource portfolio management. However, it does appear that the industry has somewhat plateaued at roughly 20% of firms utilizing a third-party investment management solution while the vast majority of the industry continues to manage investment portfolios in-house.
Average Outsourced Portfolio Management Fees Charged by TAMPs
A closer look at the 21% of RIA firms that outsource portfolio management reveals that the average total outsourced investment management and other fees charged to a client is 0.42%. This average 0.42% is in addition to the average investment advisory fee of 0.90% charged directly by RIA firms that outsource portfolio management. The average outsourced investment management fee charged to clients of 0.42% is slightly higher than the median outsourced investment management fee of 0.40%:
While firms that outsource portfolio management charge, on average, a smaller advisory fee, the total fee charged to clients is 9% higher compared to RIA firms that manage investment portfolios in-house. Our survey does not look at or compare performance of investment portfolios managed by a third party versus portfolios managed directly by a RIA firm. Such analysis would better help answer the ultimate question as to whether the increased all-in fee charged to a client is justified by better investment portfolio performance for the client?
Be sure to check back soon as we further analyze the relative advisory fees by taking a closer look at underlying product fees with a focus on mutual funds and exchange traded funds.