A Small Investment Company Launches a TAMP for the Little Guy

Potomac says competitive pricing and superior service will make Union a viable business, even amid consolidation.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

After years of listening to complaints about turnkey asset management platforms, or TAMPs, a small investment firm that manages portfolios for financial advisors is launching its own.

Potomac Fund Management, founded in 1987, is an RIA with a handful of strategies built with mutual and exchange-traded funds designed to smooth volatility in portfolios without sacrificing too much in returns. It manages about $150 million, primarily for the private clients of wealth managers. The business has been successful but Potomac couldn’t resist pursuing what seemed like an obvious opportunity.

As advisors generally shift to offering a more holistic set of services, they are increasingly pressed for time and seeking ways to simplify their businesses and be more efficient. The majority of practices are ill-equipped to build and manage custom portfolios for clients, and more advisors are exploring ways to make investment management easier, or outsource it entirely.

TAMPs help advisors do that and collectively manage an estimated $524 billion. The three largest — Envestnet, SEI Investments, and AssetMark — account for almost 60% of the market. But some advisors feel their service has suffered, at least to some of their relatively smaller customers. For that reason, Potomac sees opportunity for another small TAMP to emerge, even amid the consolidation in the space.

This month, Brookstone Capital Management and FormulaFolios agreed to merge and create one of the largest TAMPs in the U.S. with over $6.5 billion. And in June, Genstar Capital purchased a stake in Orion Advisor Solutions with plans to merge the company with Brinker Capital, a TAMP with $24.5 billion under management.

“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.

That won’t be the case with Potomac’s new Union platform, he says. The TAMP has no intention of growing beyond roughly $3 billion in assets under management, and certainly not $5 billion.

Khatta is not nervous about the consolidation or going up against the behemoth TAMPs, which have been outspoken about acquiring “sub-scale” competitors. Four RIAs managing a total of $125 million are already using the new TAMP and others are waiting, but Union is slowly onboarding them to maintain the service it promised.

Unlike some other TAMPs, Union will have a shorter list of strategies for advisors. “TAMPs give you 500 to 1,000 strategies to choose from, and that’s a benefit, but it’s also a con because there’s no one out there that’s actually trying to curate these with the managers,” Khatta said.

Potomac plans to spend time with every advisor, deliver them data and information about each manager that isn’t as readily available from other TAMPs, and help them make selections from roughly 200 funds. The objective is to have a portfolio tailored to each advisor’s book of business and avoid performance chasing that tends to happen, according to Khatta.

Potomac’s strategies will be part of the Union platform and the others will align with it philosophically. The strategies are generally a balance of passive, strategic, and tactical investment funds.

Also, unlike some TAMPs, if an advisor likes a fund manager that isn’t on the Union platform, Potomac will consider adding them if other advisors might use them. “We’re not above [advisors] or think that we’re better than them at doing this. So, if they come to us and say, we have a manager that we really like, we’ll sit down, and find out why and incorporate it into the mix.”

But a totally crowdsourced list of strategies would defeat the purpose of the TAMP. Advisors who subscribe to Potomac’s investment philosophy shouldn’t have too many special requests. Those who do, might not be a good fit in the first place, and that specialization is another reason Khatta is confident small and medium-sized TAMPs will continue to be successful. It’s hard for a TAMP to be everything to every advisor.

As long as advisors call and someone answers or calls them back in a timely fashion — and the advisors don’t have to explain their problem all over again to a new person — Khatta says Union will be successful. Union is trying to avoid “the Comcast effect,” a criticism and comparison to the cable company’s customer service.

“No one likes calling Comcast. They increased my bill six months ago and I still haven’t called because I do not want to talk to them. And that’s the same thing where you lobby service requests and they just don’t get taken care of. And you’re constantly following up and [then] you quit, you just give up.”

Solving that headache will attract advisors, if all other things are equal. The cost of Union will start at 40 basis points, a price competitive to other TAMPs, and it is using Orion’s technology to support the platform, which other TAMPs do, too.

“There’s still going to be opportunity for smaller businesses that can offer the service and the handholding. I think people still are going to yearn for that. Not all of us want to just go through a chatline to get everything we want.”

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