Delving Further into TPAMs (Part 1)

Last time I did an exhaustive job of presenting official definitions for IA and IAR along with unofficial uses for the term “financial advisor” (FA). Today I want to review the case for TPAMs.

I use “FA” to mean those who interact with the end (retail) client. FAs provide financial planning services. Legally, FAs are IAs even though they may outsource the investing altogether.

TPAMs are IAs that do not typically associate with the retail client. I can understand this from a cost perspective. By avoiding the public, they can reduce labor and focus all their time on developing and executing trade strategies. In addition, most retail clients can get sufficient information from their FAs because they lack a complex financial understanding that would demand response from the expert (TPAM).

I fail to understand why TPAMs would avoid retail clients as a matter of policy, however. I should be allowed to communicate directly with those who will be exercising trade discretion over my capital. This is why I frown on First Ascent. Consider some analogous situations in other industries. If I have a question about a particular food then I am not limited to speaking with the grocery store manager: I call the manufacturer directly. If I have a question about a particular plane flight then I can speak directly with the captain and first officer as I disembark. If I have a question about a surgery then I am not limited to speaking with the medical assistant: I speak with the surgeon directly. I have even interacted directly with a program developer when having tech issues, which is a main reason I recommend AmiBroker.

If I am going to work as a TPAM then I need to understand what the average TPAM offers. I can then decide whether it makes sense to enter the fray. This was part of the plan when I started blogging about these things.

When evaluating a FA, it might make sense to consider the “investing chain.” Each intermediary requires a small management fee as compensation for services rendered.

Equally or more important to intermediaries is the skill and/or strategy applied. Will it be a plain-vanilla/garden-variety approach (e.g. Investing for Dummies) or will it be a deeper application of intellectual capital (e.g. quantitative analyst, programmer, statistician, etc.)?

I will continue next time.