In the post-RDR environment, advisers are continually confronted with a quagmire of challenges around cost-cutting and pricing structures. In the new regulatory landscape, many are struggling to cope with being unable to charge for their services in the same way and many are having serious issues with justifying fees to their clients.
While many advisers have now ‘warmed up’ to the concept of outsourcing core business functions in an attempt to cut costs, the fact remains that a vast majority still have major concerns with outsourcing to a discretionary fund manager.
These advisers are struggling to charge the same fees for their services and are looking for other ways to drive down costs. An overwhelming majority believe they will be unable to justify their pricing if they choose to outsource the management of their client portfolios.
It is perhaps worth looking at some of the biggest fears advisers have over outsourcing.
Control
Adviser fear: If I outsource to a DFM, they will take over total control of managing my client portfolios and I will be cut out of the process altogether.
Response: The job of a DFM is to save you time and money by doing only the tasks that carry the least value for your business, but remain essential, leaving you in control of the client relationship. With charging and pricing presenting a serious issue post RDR, advisers need to switch their focus from trying to juggle all areas of their businesses to attracting new clients. We believe this should also be reflected in the fees charged by all DFMs, which need to remain competitive in order to appeal to the needs of today’s advisers. Ultimately, this approach will help you to recover the costs from lowering your fee to your clients as it allows you to focus on growing your business in these challenging times without wasting your time on administration, paperwork and extensive fund research.
Cost
Adviser fear: Why should I pay a DFM when I can do fund research and investment management myself? My clients expect me to take care of these services on their behalf so how can I then justify my fee?
Response: You need to take a measured approach to outsourcing by pinpointing ‘low value’ core business functions and processes you can outsource as and when you need to. This many not be as obvious as it seems, for you might find you would prefer to retain the investment management for some but not all of your client base which needs careful consideration. For most of our clients who are small IFAs, this usually means the management of smaller client assets that are usually well suited to sit within one of our model portfolios. It also typically extends to fund research, which can be supported most effectively by a team of expert analysts. Outsourcing even a small part of your business can save you a significant amount of time which would be better invested in identifying new clients and maintaining close relationships with existing ones. Your fee can be adjusted accordingly and can be justified by delivering a quality level of personalised customer service, which clients are always happy to pay for.
Communication
Adviser fear: What support will I get? Will I be updated regularly? How do I know that I won’t be cut off from my clients?
Response: These are the kinds of questions you would be well advised to include in your due diligence form when you are selecting from a few different DFMs to partner with. Again, the key to this is careful planning. It is important to take time developing a detailed set of due diligence standards and questions to ask from the outset. You would be wise to ask how many hours in an average month you are expected to have time with your dedicated investment manager. Ask whether this will also cover face-to-face time as well as phone and email updates. Many small providers often prefer to partner with someone locally for this reason, as they are likely to have more face-to-face interaction with their manager and are able to build up a solid relationship. The relationship between DFM and adviser should be a seamless fit, which is why you need to make sure that you are asking all the right questions, once you have taken the decision to outsource.
Understandably, the hostile post-RDR landscape has left many advisers feeling caught between a rock and a hard place. However, with some careful research and planning, that really need not be the case. Advisers can choose to make outsourcing their best friend or their greatest foe; it is all down to how much planning and time they invest in accurately identifying which parts of their business are of the highest value to them and which could readily be outsourced in a cost-effective manner. If you manage to succeed in this, you have nothing to be afraid of.
However, we find that it can be a case of ‘old habits die hard’ and egos can get in the way far too often. A handful of advisers who have been in the industry for a number of years have always managed to stay afloat by doing everything themselves - usually at the expense of developing and growing their businesses to the fullest potential - but have survived nonetheless.
However, times are changing far more rapidly than the industry had anticipated in the wake of RDR and those who refuse to move with the times will inevitably get left behind. Advances in technology coupled with a new trend for DIY investing and crowd funding are just some of the biggest threats to advisers in the new regulatory landscape, without even taking costs into account. Therefore, those who refuse to adapt by trying to do it all in the old way are fated to become a dying breed.
Once you have overcome the three Cs and taken the decision to outsource, then comes the real challenge of how to do it successfully. That is why we recommend before trying to cut costs, advisers should adopt a careful strategy for segmenting, or scoring, their client base according to the level of ongoing service they require against a scale of profitability.
Ideally you should categorise your clients into three groups, ranging from the clients needing a very hands-on level of service, to those whose requirements could just as effectively be met with a small amount of time and involvement. This simple process of client segmentation will help advisers to pin point exactly which functions and areas of their businesses can offer them the most considerable cost savings. Its a worthwhile exercise detailing the process required for the different types of client and establishing approximately how much time will need to be spent on each function every month to meet their requirements.
With a client segmentation table or chart in place, it is then possible to decide how to outsource the areas of the business that have scored six or less on the profitability scale. Three of the areas that usually need to be outsourced include fund research, investment management and the design and management of risk-graded portfolios. There are a number of different ways to outsource these core business functions with the use of platforms and DFM’s.
Outsourcing core functions with the combined use of platforms, DFM(s) and third party compliance officers most crucially leaves the adviser with a significant proportion of his or her time to focus on winning new business and maintaining solid relationships with existing clients. This is the most vital part of remaining profitable in the new world we are living in, where competition is fierce and costs are rising by the day.
Chris Mayo is investment director of discretionary investment manager Wellian Investment Solutions
