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Debate: Does outsourcing undermine an IFA’s business?


    As advisers’ time becomes increasingly valuable post-Retail Distribution Review, many may well be looking for ways to streamline their business to keep costs down and spend as much time as possible with clients.

    As such, there has been increasing talk of many firms considering outsourcing their investment function to third parties such as discretionary managers. Although statistics continue to show the majority are still keeping this in house, at least for most clients, interest seems to be increasing.

    But does outsourcing undermine an adviser’s business, especially if they are seeking to retain independence? Some believe the adviser who outsources effectively makes him or herself into a redundant middleman.

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    Here, two advisers go head to head on the benefits and risks of outsourcing.

    This house believe that outsourcing to discretionary managers reduces the value offering of the referring IFA.

    Arguing for the motion: Dennis Hall, Yellowtail Financial Planning

    Cost is one of the few things I have some control over. Everything else, such as how markets will move, which sectors will outperform, and even which managers will outperform, is speculation. The extent to which my clients are exposed to speculation is also something I can control, which is why I don’t outsource investment management to discretionary fund managers.

    The evidence shows that the majority of managers are unable to consistently outperform the index year after year. Outperformance doesn’t work at a stock picking level, so what makes advisers believe DFM’s can consistently pick winning funds, or even winning sectors?

    Of course the majority of DFMs don’t share this view of the world, and even if they did it introduces a layer of cost that I cannot justify. The problem with DFM’s is that even when running portfolios comprising passives - which we like - they cannot stop tinkering. They call it ‘tactical asset allocation’.

    Commercially it is a nightmare. You may be the gatekeeper, but the client assets sit with someone else. Also the level of influence you exert is diluted, even if only by a small amount. If you are deferring to someone else’s expertise you potentially undermine your own position; sacking the gatekeeper might be a lot simpler than sacking the DFM.

    Finally the value of your business is still measured by the value of funds under your control. The wealthiest firms are those that keep their clients money closest to them.

    Arguing against the motion: Carl Lamb, Almary Green Investments

    As an independent financial adviser, it is important to us to offer a range of potential solutions that are designed to meet the needs for all our clients. For us it seems a natural progression that our client proposition should offer access to bespoke professional fund management where it is appropriate to the client circumstances.

    A good example of where outsourcing investment management really comes into its own is when we are advising “lay trustees”, who perhaps do not have the required expertise and experience to manage the trust assets efficiently and meet the requirements of the Trustee Act 2000.