Advisors are also finding investment outsourcing applicable to a greater scope of client accounts. Previously advisors tapped external help for only their largest or more sophisticated clients, while keeping smaller accounts close to home, but many are now starting to use external help for all accounts. Popularity for this “all-account” approach has increased dramatically over the past four years, from 33% in 2016, 39% in 2018, and 49% in 2020. That said, the incorporation of external managers in all activities decreased by 38% from 2012 to 2020. Advisors are more interested in having outside help for a specific investment function, rather than the whole portfolio.
There are several additional factors that could point to further growth in the future as outsourcing evolves. Advisors who maintain investment management in-house identified several specific changes that would lead them to work with a third-party investment manager. The most critical factor in this decision was affordability. Nearly half of 2020 respondents who didn’t outsource indicated that more affordable solutions for investment management options would make them reconsider. The availability of a user-friendly technology platform and a broader range of outsourced investment management solutions essentially tied for second, at approximately 24% of respondents citing each as important.
Despite improving attitudes towards outsourcing, many advisors believe that in-house management is critical to client relationship building. They are choosing to keep their newest accounts in-house as they get to know clients and their expectations of an advisory relationship. Once trust is established, advisors may feel more comfortable exploring the use of external managers to consider tactical and/or tax-managed strategies
Actionable Strategy For Impressing Clients
In the end, driving growth and increasing revenues requires firms to deliver deeper value and an exceptional client experience. Ensuring that clients achieve both their investment and personal goals can sometimes be supported by incorporating external investment management in the mix. Firms may find that outsourcing allows them to devote more time to clients, solve holistic financial issues and/or implement tactical strategies that deliver more alpha. As firms face growing pressure on their bottom line, we are seeing them become more strategic about where they find efficiencies. Outsourcing is no longer an all-or-nothing proposition for advisory firms.
Laura Hanichak Gregg is director of practice management and advisor research at FlexShares and host of The Flexible Advisor podcast.