Published November 12, 2020
In many industries, the term “scalable” is used fairly often, and it’s worth a look to see how that concept applies to Turnkey Asset Management Platforms (TAMPs). Understanding scalability can help an RIA determine which platform their firm should leverage to manage assets and operations on a continual basis.
When economies of scale are discussed, the textbook example often highlights a factory that can theoretically lower the production costs of its widgets. If a company makes and sells picture frames, for instance, it will likely be a lot less expensive to purchase wood by the ton rather than paying for a single pallet. Purchasing raw materials in large quantities allows a manufacturer to realize lower production costs and higher profits if all else goes well.
How might this economic theory apply to TAMPs and the advantage of scalable solutions?
Well, there are no tangible goods being produced by a TAMP, but there are three distinct advantages that scalable platforms can pass on to their clients. And at least from a cost perspective, one can see how production might relate to asset management. Here is a glimpse of how scalability benefits an advisor.
Potentially Lower Fees
Net returns are a huge part of a successful strategy when managing a client’s money. If an advisor can negotiate fees downward, then they can choose to pass on the savings to their clients. A TAMP that is truly scalable will be able to adjust its fee structure for advisors with greater AUM.
In this way, scalability applies to TAMPs much as it does to companies that produce physical goods. The larger a firm is, the more bargaining power it has with respect to the fee it might pay a single platform that can run an advisor’s business.
Optimized Staffing Expenses
In the TAMP arena, scalability also relates to an advisor’s advantage from outsourcing many back-office duties and tasks. This can help an RIA concentrate on more important pursuits, such as gathering assets or advising existing clients. Staffing can be an expensive endeavor and as the business grows, additional resources may need to be added as certain thresholds of AUM are met. At these larger stages, the scalability of a TAMP allows these functions to be outsourced at a lower cost than the cost of attracting and retaining new personnel.
Minimized Opportunity Costs
Any savings garnered from economies of scale can be invested elsewhere. For organizations with assembly lines, that usually translates to the purchase of new equipment to produce goods faster and cheaper. For an investment advisor who sees growth as a primary business objective, lower costs translate to dollars that can be diverted away from operational expenses and allocated toward increased sales and marketing efforts or toward client retention.
The Top and Bottom Lines
Engaging the right TAMP has the desired effect of boosting revenue while lowering operating costs. A platform that is scalable and innovative lets the business simplify or automate many of the daily operational duties that might otherwise consume a large portion of time and resources. As an RIA grows, a scalable TAMP can convey benefits that reflect positively on revenues and strengthen the bottom line. And for advisors, those goals also help define success.