Why Advisors Out-Source

Financial advisors cover a lot of territory, from mapping out your portfolio strategy to creating your estate plan. But like doctors, they need to specialize. You consult the cardiologist for your heart murmur, not the allergist. Sometimes your advisor may call in specialists to address your needs.
 
This is true whether they are asset managers, who look after your portfolio, or wealth managers – their mission is broader, overseeing all the risks in your life, such as getting you adequate insurance coverage.
 
“There are so many moving parts” to financial advice that enlisting outside expertise is vital, says Craig Poeppelman, a financial advisor with Harper Associates in Upper Arlington, Ohio. “I’m a retirement planner and investment advisor. So I will bring in a guy who can analyze whole life policies. He can tell my clients what is the best price.”
 
Some advisor firms hire out investment management, with outside managers handling different sectors. Say, one for large domestic stocks, one for tech issues, one for international bonds and so on. Argent Wealth Management in Weston, Mass., for instance, brings in outside money managers with particular expertise, but is very careful about who it out-sources to.
 
“We don’t give managers carte blanche,” says Joseph Finn, Argent’s business development director. “We monitor what they are doing. We have considerable expertise on the inside.”
 
To its clients, Argent touts the prowess of its hired guns. In its winter 2012 report Investment Report, Argent writes that it is “exceptionally bullish on a small group of highly skilled managers that focus on credit-oriented sectors” -- mortgages, high-yield and senior secured loans. Spreads over benchmark securities like Treasury bonds are wide and defaults are low, the report says, thus it believes “returns will be substantial.”
 
At ProVise Management Group in Clearwater, Fla., most of the money running (assets under management: $750 million) is done in-house – with the crucial exception of municipal bonds. Munis require deep knowledge as there is no national market for them, and pricing them is not easy.
 
Although many local and state budgets are strained from the troubled economy, dire predictions of massive defaults have not materialized. As a result, they remain popular among wealthier clients, who like their tax-free yields. “Several of our clients have a lot of munis,” says Ray Ferrara, ProVise’s president and chief executive officer.
 
One area that ProVise keeps in-house is insurance. This is a daunting discipline, requiring expertise in risk assessment, actuarial tables and lots of higher math. For other non-investment areas, the firm turns to outside help, such as with legal matters, employee benefits and taxes.
 
At Jacobs Investment Management in Nashville, Bill Jacobs, its president, has considerable knowledge about investing, yet also taps the know-how of others outside his expertise. “I’m a certified financial planner – I don’t sell insurance or do wills,” he says. “But I can give them people to talk to. For instance, I share office space with an accountant. I can refer people down the hall to him.”
 
Jacobs makes sure to stay closely in touch with all the outside advice given. He refers clients to an estate attorney – and goes with them to the appointment. While he may not be as much an expert on this is the attorney, he knows enough to guide his client.
 
An example of how daunting the estate area is: Starting next year, if Congress does nothing to change it, the amount of money that can be passed tax-free to heirs drops to $1 million from $5 million. That is prompting a push for an A-B trust set-up, where the estate is divided into two trusts, one for the kids, one for the surviving spouse (usually mom). When mom dies, the kids get that money, too. But taxes will hit the entire slug less heavily.
 
“Estate law is very complex,” Jacobs says.
 
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