From Adviser Guide: Outsourcing fund management part 1
Q: What is outsourcing?
Outsourcing means passing over some (or all) of the adviser’s work regarding the research, selection, review and management of a client’s investment portfolio.
Put simply, Carl Lamb, managing director of Almary Green, said it is the buying-in of expertise for what is a highly specialised job.
IFAs have a wide range of skills and specialism but Mr Lamb said in essence a good IFA is a client-focused empathetic individual whose role is to focus on the holistic picture – the client’s lifetime goals and needs.
Reactive portfolio management requires a different skillset – a narrow focus on the minute-by-minute movements of markets and prices.
Mr Lamb said this is the job for the outsourced investment manager.
He said: “A good investment manager will not only run the fund for the benefit of the client, but will also offer guidance to both the client and the IFA on investment choices and trends.
“The client is at the heart of the outsourcing arrangement and will engage with both the IFA and the investment manager on a regular basis.
“This not only enables risk tolerance, income requirements and the client’s material circumstances to be reviewed, it also provides the client with the opportunity to get involved in the debate and to understand the logic behind investment decisions.”
The outsourcing partnership will usually involve three parties in addition to the client: the IFA, the fund manager and, importantly, the provider who offers the technology platform on which the management is run.
Finding a happy marriage of fund manager and technology provider is absolutely critical to the selection of an outsourced solution, according to Mr Lamb.
Traditionally, Mark Soonaye, product director of Octopus Investments, said an adviser will conduct a detailed survey of their client’s financial position, preferences and objectives (the fact find).
They will then advise appropriate action to meet the client’s objectives, according to Mr Soonaye, and if necessary recommend a suitable financial product to match the client’s needs.
In the case of clients with investment needs, Mr Soonaye said the adviser would typically build a portfolio of investments (normally consisting of managed funds), and has responsibility for researching, selecting, reviewing and managing this portfolio.
It is these elements that can be outsourced.
The Financial Services Authority (FSA) will be implementing its Retail Distribution Review (RDR), with the aim of modernising the way advisers recommend investment products.
Mr Soonaye said: “Advisers will need to consider how to make their business models more efficient given the upward pressure on servicing their clients (costs) and downward pressure on revenue.
“Outsourcing is about creating a process that allows the adviser to focus on the areas of the business that are most important and therefore deliver a more efficient and profitable service.
“RDR is encouraging advisers to consider any areas in which outsourcing may enhance profitability and sustainability.”