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Special Report

Spotlight on Outsourcing - October 2012

Published by Investment Adviser | Oct 01, 2012

As advisers review their services in the run up to RDR, many have begun to realise that they cannot be all things to all men and devote their time and resource to all areas of their business, while still achieving a satisfactory outcome for their clients.

One area that some advisers are particularly keen to outsource to other providers is investments. Research from consultancy Defaqto, for instance, shows that more than one fifth of advisers are now outsourcing clients’ investments to discretionary fund managers.

In a report entitled ‘Discretionary Managed Portfolio Services: Case Study’, Fraser Donaldson, insight analyst for funds at Defaqto, says: “This is partly as a result of the RDR expanding the universe of required investment research and partly as a result of exceptionally volatile markets over recent years.”

Outsourcing these functions can bring many benefits, including enabling firms to offer a rounded range of services for clients, while concentrating on their individual strengths and expertise. Not only this, but by removing the administration burden, advisers will be able to spend more time building on client relationships and offering more personalised financial planning.

In the past, discretionary fund managers have distanced themselves from the mainstream market and focused their attentions on operating at the top end. However, this has changed in recent years as increasing opportunities have presented themselves in the retail sector.

It’s no surprise, therefore, that the UK is offering a greater range of discretionary fund management services than ever, allowing more and more advisers to deal right across a range of clients.

Oliver Gregson, head of investment advisory at Barclays, says: “For a regional IFA, it’s very difficult and indeed costly to build investment expertise and try and do individual manager selection. If an IFA wants to pick a third party fund themselves, they absolutely could do, but they need scale and expertise. There are more than 70,000 funds out there. To try and make sure they are providing effective coverage of that universe is difficult.”

Mr Gregson concludes that investing with someone who’s got “real scale and experience” with individuals is becoming increasingly attractive in today’s fast-paced markets.

Mike Webb, chief executive of Rathbone Unit Trust Management, agrees. He observes that after the RDR, strong relationships with clients will become increasingly important for advisers, particularly as clients and advisers handle the switch to the new rules - in particular, the change from advisers taking commission out of charges paid by clients to advisers charging clients directly. This relationship building leaves less time left over to manage clients’ investments, particularly for IFAs, who will have to survey the whole of the investment market to pick products for clients.

“IFAs need to add value to the relationship if they’re going to charge ongoing fees. So building relationships, monitoring client portfolios and making sure they’re suitable for a client’s risk profile will become a critical part of what they do. By turning to a discretionary fund manager or using multi-asset funds, advisers can spend more time with their clients while running a whole of market approach which is less resource intensive,” he says.

Mr Webb argues, however, that outsourcing is not always the best option, and IFAs will need to look at their business model and decide what suits them best. Mr Gregson admits that a lot of clients have been left feeling frustrated, let down and disillusioned following the credit crunch, and says that Barclays Wealth are seeing a lot of IFAs who are actually trying to take the decision making back in their own hands, and keeping investment decision making in house.

Whether they eventually choose to outsource part of the decision making process or not, the onus is on the IFA to carry out the necessary research and justify the conclusions and costs to the client. Mr Donaldson concludes: “While numbers and years in the industry doesn’t guarantee success, it does improve the chances. Finding out about the investment team is an important part of the due diligence process and one that advisers should allocate considerable time to.”

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