With advisers saying that over 80% of their revenue is coming from investment business, the idea of outsourcing this crucial function seems counter-intuitive. Why would advisers pass over to another business the activity that appears to drive their main revenue earner? And yet it seems that the trend is for more outsourcing of the investment function by advisers, according to Platforum’s upcoming Adviser Market: Adviser Propositions research.
We found that there are several kinds of outsourcing – bespoke portfolios run by DFMs, model portfolios also managed by DFMs and one could argue that multi-manager and multi-asset funds are a form of outsourcing.
With all these solutions, it is pretty obvious that the clients would be aware that the adviser was not running their money. Most advisers who outsource the investment function nevertheless charge fees based on the value of client portfolios.
You could argue that getting a DFM to design and run an advisory firm’s in-house centralised investment proposition would also count as outsourcing. But from the client’s point of view it looks as if the advisory firm is running the money. The third party DFM is either wholly or more or less invisible to outsiders.
The percentage of investment assets that are outsourced has been rising in recent years. The proportion of assets outsourced by advisers rose from 18% in May 2013 to 26% in April 2017. The upward trend wasn’t a straight line – there seemed to be something of a plateauing in 2016.
What’s striking is that a very high proportion of advisory firms outsource at least some of their investment functions. So the proportion of advisers who use outsourced solutions is a good deal higher than the proportion of assets in these portfolios.
Part of the explanation for this is that many advisory firms are transitioning between in-house and outsourced approaches to investment. But there are also many advisory firms that are still fund pickers or use in-house centralised investment propositions. It has long been the case that such advisers may recommend DFMs’ bespoke portfolio management solutions for some of their clients – especially the very largest.
Nevertheless, we found that many advisers are still unrepentant investment specialists who like to run the money themselves. As one of this breed of adviser told us: “I am a bespoke fund picker, which I am proud of... This allows me to create bespoke portfolios that are better suited to the client’s attitude to risk and requirement...”
So what is driving this growth in outsourcing? Increasing numbers of advisers accept the argument that they aren’t able to run money and also carry out the financial planning function including tax and pensions, protection, cash flow forecasting and estates, as well as nurturing, reassuring, educating and understanding clients’ aims, fears and aspirations.
As another adviser told us: “We believe in financial planning and investment management but as separate businesses – financial advisers shouldn’t manage the money.”
It will be interesting to see whether the MiFID II requirements for greater transparency of annual charging will accelerate or slow down this trend to outsourcing.
We look at the trend to outsourcing in our recent report Model Portfolios on Platform and tackle adviser approaches to recommending long term investment solutions in our new report Adviser Market: Adviser Propositions, which is published next week.