Making your advisory practice more efficient starts with the basic concept of maximizing limited resources to produce more revenue. While there are several ways to do this, such as turning to digital client tools or offering hybrid-pricing solutions, the biggest challenge then becomes maintaining client service and a personalized experience. So, how can advisors grow their business without sacrificing their current service?

For many firms, outsourcing to external investment managers may be the answer. Northern TrustAsset Management’s FlexShares ETFs has been studying the topic of investment outsourcing for the past decade through our “Race to Scalability” advisor surveys, and found more than a third of advisors consistently choose this route. The original study in 2010 found that 42% of respondents had decided to engage external managers, and 10 years later the number remains almost the same at 41%.

However, the findings of 2020 point to changing perceptions in the industry, as traditional methods continue to be tested by environmental factors and new lines of business. In early 2020, FlexShares surveyed more than 500 respondents in the advising industry, including RIAs (33%), independent broker/dealers (35%), hybrid/dually registered RIAs (13%), regional broker/dealers (8%) and insurance broker/dealers (6%), whose responses suggested that additional growth for external management services could lie ahead.

The report found dramatic decreases in the percentage of non-outsourcing respondents who claim that their minds will “not be changed” when it comes to using an external manager. The number of participants willing to reconsider outsourcing options went from 48% in 2010, to 70% in 2020. This change in opinion from advisors has opened the door for greater considerations to switch up business models and move into new strategies which in-house options may not offer.

Transition Into New Approaches
What is the primary reason for this change in perspective? In 2020, the Covid-19 pandemic pushed many businesses to reevaluate every aspect of their business profile and model. This included a reassessment of how the firm delegates its investment management. Of the respondents who keep investment management solely in house, 15% said they plan to increase their reliance on third-party assistance and 85% said they plan to reconsider incorporating an outside manager into their business line. With the pandemic continuing to shake up traditional ways of doing business, FlexShares expects this trend to continue going forward.

Another element in transition is the number of advisors who view investment management as their core value proposition, which has been on a relatively steady decline. Advisors have begun to demonstrate their value in a broader range of activities, and there has been a general industry shift to a more holistic financial planning approach. In 2020, 33% of respondents told us they saw investment management research as their primary business proposition. Slightly higher than 32% in 2018, the percentage has been on an overall decline—from 54% in 2012 and 56% in 2014.

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.