A Critical, Little-Known Corner of Finance Reawakens

(Illustration by RIA Intel)

(Illustration by RIA Intel)

“There’s so much going on that it’s hard to even know where to start.”

To his knowledge, Mike Wunderli is the only investment banker who has almost wholly dedicated the last four years of his professional life to TAMPs, a small, lively corner of finance virtually unknown to retail investors.

TAMP is a broad term and “hundreds” of people Wunderli talks to each month have their own definitions, he said.

Generally, TAMPs, or turnkey asset management platforms, provide outsourced investment management services to financial advisors. They do this two ways. Some provide a preapproved menu of strategies, funds or securities for advisors to choose from, or manage investment portfolios entirely on behalf of advisors. Other TAMPs are technology providers that offer a mix of portfolio management, reporting, billing, and other services. Many TAMPs do both of those things to some degree.

The combination helps advisors build investment portfolios, or relieves them of that duty entirely, and it spares advisory firms from building or managing a patchwork of software needed to run their businesses.

In short, TAMPs make advisors better conductors of client portfolios and frees up time for them to focus on other things. For that convenience, wealth managers pay a fee, usually a percentage of their assets under management. Fees vary but the cost of hiring a TAMP to manage client portfolios hovers around 40 basis points.

TAMPs manage an estimated $524 billion on behalf of advisors, a small portion of the $7.4 trillion managed account market in the U.S., according to Cerulli Associates, a Boston-based research and consulting firm. But TAMP software enables trillions of dollars to flow through the world’s largest asset managers, endowments, foundations, broker-dealers, and other wealth managers, including independent RIAs. The list of TAMPs is relatively short given the reliance on them by financial services. There are little more than about 40, according to Wunderli, who is a managing director at Echelon Partners, an investment bank and consulting firm.

Still, the dealmaker is wildly busy. “You’re the second reporter I’ve talked to in the last year because I just don’t have the time,” he said.

This spring, the spread of the Covid-19 pandemic caused an expected lull in mergers and acquisitions within the wealth management industry. But activity has rebounded strongly. A recent deal has triggered frenzied interest in TAMPs, according to Wunderli.

“Every single day I’m talking to multiple buyers in the market and TAMPs. And it’s crazy. There’s so much going on that it’s hard to even know where to start.”

On June 29, a formative deal supercharged the market for TAMPs.

Genstar Capital, a San Francisco-based private equity firm, announced that it purchased a stake in Orion Advisor Solutions and planned to merge it with Brinker Capital, one of the biggest TAMPs managing $24.5 billion. Genstar now has an equal stake in Orion with TA Associates, a private equity firm that had been Orion’s majority shareholder since 2015.

“When that deal was announced, I was already over my head,” Wunderli said. “My email and phone have been lighting up ever since.”

Brinker CEO Noreen D. Beaman called the merger “game-changing” and the strategy behind it was straightforward. The deal combined two companies with different core competencies; Orion’s technology and Brinker’s investment management. Independently, the two did not intimidate the field. Things look different today. The two largest, publicly-traded TAMPs, Envestnet and AssetMark, now have a competitor “a little closer in their rearview mirror,” Wunderli said.

But if there is a TAMP race, Orion and Brinker have not even begun a flying lap (one started at optimum speed). The new private equity creation still has to synergize and the combination will be well behind other TAMPs, at least in terms of assets under management.

The three biggest TAMPs — Envestnet, SEI Investments and AssetMark — account for almost 60% of the estimated $524 billion market, and they aren’t worried about Orion.

“Our initial foray was absolutely as an asset manager, Bill Crager, the CEO of Envestnet, said.

Crager took over as the chief executive last year after Judson Bergman, the chairman and CEO at the time, was killed in a car crash. Together, they co-founded Envestnet in 1999 to make investment management easier for advisors. But over two decades, the company’s technology is what has made it into the massive TAMP it is today. Envestnet manages an estimated $185 billion and has the most widely used software, including Tamarac (portfolio management, performance reporting, and other services), MoneyGuide (financial planning software), and data aggregation and analytics (Yodlee). Other companies have done the opposite; started as service providers and later built their investment management business.

The biggest TAMPs are performing a balancing act in pursuit of creating the best comprehensive service offering for the most advisors and in the future, how the successful companies started will be “indistinguishable,” Crager said.

Companies need scale to properly invest across their businesses, but Envestnet didn’t declare victory after meeting any threshold of assets and there is no defined finish line.

“It’s competitive but I’m always a little mystified around that size conversation. I mean it’s interesting, it’s a headline. But at the end of the day Envestnet is not seeking to be bigger, we’re seeking ways to serve advisors the way they want to be served in the future. To me, size is helpful from a scale standpoint but it really doesn’t impact so much what you’re able to do organically.”

AssetMark President and CEO Charles Goldman said last summer during the company’s first earnings call there were “sub-scale” TAMPs ripe to be acquired (and it has done two deals since its initial public offering). But, like Crager, he reiterated that organic growth is the focus. Goldman tells the sell-side research analysts who cover the TAMP not to bake mergers or acquisitions into their models.

“It is a part of our strategy but it is serendipitous. You can’t predict it so don’t model that. That’s a wise thing when you think of most businesses, unless you’re just a straight roll-up,” Goldman said.

Discussions were happening and valuations for RIAs and TAMPs were high in the first quarter, according to the executive. During the second quarter, when new Covid-19 cases were sharply rising in the U.S., those talks halted. “The markets just died. They were just dead. Nobody was doing anything.” Goldman is also on the board of Mercer Advisors, a Denver-based RIA with more than $15.8 billion and 400 employees, and Personal Capital, a $12.6 billion RIA known for its digital wealth management.

But Goldman has witnessed renewed interest in buyers and sellers of TAMPs and RIAs, like Wunderli has.

All of the executives and others interviewed for this story said TAMPs have powerful tailwinds: The independent wealth management channel is expected to continue to grow and the role of the financial advisor continues to change, to the benefit of TAMPs.

Most RIAs are small business owners crunched for time and advisors are increasingly expected to be a comprehensive service provider. Since the majority of firms are ill-equipped for investment management, more advisors are turning to TAMPs for help. Personal relationships that help clients identify and reach their goals is how advisors are most valuable. Clients also required a tremendous amount of additional attention due to the pandemic, which accelerated their interest in TAMPs’ other services, Goldman said.

Advisors need a “wake up call” if they think their value proposition is “picking or using six funds and four of five risk profiles and walking people through your office and somehow you’ve differentiated. You’ve got to be kidding me. That is not where the business is going. And TAMPs are here to really make the advisors way more valuable to the end client, to the investor,” he said.

Scale matters and it seems everyone is expecting TAMPs will continue to consolidate. So, why are new ones still popping up? What hope do those businesses have?

Earlier this month, Potomac Fund Management, an RIA founded in 1987 with a handful of strategies built with mutual and exchange-traded funds, said it was launching its own TAMP in response to complaints it was hearing about larger ones.

“We, over the last couple of years, have just heard overwhelmingly how frustrated advisors are, because they feel like their only choices are these handful of large TAMPs. But unless you have a certain amount of money, there’s zero customer service, and they get the call center ticket approach,” Manish Khatta, president and chief investment officer at Potomac, told RIA Intel.

Wunderli says large TAMPs are aware of their weaknesses and want to address them. That is why private equity firms have taken interest in the space, to help companies scale, become massive, and achieve operating leverage to fund investments in themselves. This is a tried strategy — before Genstar bought a stake in Orion, it owned AssetMark and saw through its IPO.

The bifurcation of the TAMP world is expected to remain or widen: “The largest companies are either fine-tuning or seeking great scalability in hopes of becoming a go-to for RIAs, the golden goose for a lot of them,” Wunderli said. All other TAMPs might have their own place.

There will always be opportunities for small TAMPs that serve specific needs, Tom O’Shea, a research director at Cerulli, said.

This month, Brookstone Capital Management and FormulaFolios agreed to merge and create one of the biggest TAMPs in the U.S. with over $6.5 billion. Both companies have been successful at providing investment management and support to insurance agents. Other TAMPs specialize in working with bank-based financial advisors, or in serving high-net-worth clients and family offices that require customization and demand more attentive service than what the typical advisor or investor needs.

Those TAMPs aren’t necessarily competing with, for example, Envestnet, which works with and powers other TAMPs with its platform. Crager says smaller TAMPs, which make up the majority of the space, have a role to play. “I love those firms. I think those firms are essential.”

TAMPs managing $1 billion or less will find themselves unprofitable and either close or see a sale but pressure on all kinds of fees is shaping financial services. Brookstone CEO Dean Zayed is optimistic about the future of TAMPs but he still sought to merge with FormulaFolios. Wealth management is changing so quickly companies need to be conscious of opportunities as they come. “You know what, in five years, the new bogey might be $100 billion for TAMPs.”

Wunderli has occasionally found medium-sized TAMPs or “TAMP-like” companies that remained under his radar and was surprised that he found them. (Broadening what qualifies as a TAMP, Goldman said there could be as many as 100). At least at the moment, they have little interest in what Envestnet or anyone else is doing. “They don’t care because they are having so much success and they are doing so well that they just aren’t really talking to anybody.”

When companies are “printing money” they are less inclined to go out of their way and consider mergers or acquisitions.

In some ways, Wunderli is an explorer, a man on his own interacting with an unknown world. That’s part of the attraction, “it’s not unearthed, it’s undiscovered.”

“I love the space. I can’t get enough. I could talk about this forever,” Wunderli said. Except he couldn’t; he had another phone call.

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