Adviser firms can look to outsource for a variety of reasons. Commonly, there may be a need to access specialist services (such as payroll or human resources) where the most cost-effective option is to buy in what is required rather than try and employ or train in-house resource.
The general argument in favour of outsourcing is fairly simple: access expertise and only pay for what you require.
While that may seem fairly straightforward, there are a number of important considerations in making such strategic partnerships work for you. Ultimately, the net result of any outsourced service should be to provide a seamless link with the systems and processes of an advisory business.
In simple terms, there are two different types of outsourced relationship that an advice firm could consider:
1. Core to client offering – integral to the advice/planning process where the outsourced service is either replacing existing expertise (including product scope) or expanding new services. A good example of this might be to outsource investment management expertise.
2. Business services – access to specialist service expertise that does not exist in the business to assist in its day-to-day operations.
In recent years, the general scope of services that can be delegated to an external service provider has expanded to such an extent, that it is perfectly plausible for the only ‘hands on’ service performed within an advice business to be the financial planning relationship itself. Investment management, compliance, technology, data management and general support services have all become accepted standalone satellites to core advice activities.
The extent to which these services are deployed and/or consumed by firms in the advice space can depend on a number of factors or strategic requirements:
• Replacing or enhancing skill sets in technical areas (compliance and regulatory matters).
• Expanding service scope (access to specialist investment mandates or sales & marketing).
• Strengthening governance (external research and panel construction).
• Driving productivity (paraplanning resource).
• Risk management (external file checking and quality assurance).
• Provision of temporary staffing.
While the size and expertise of a firm may be an influencing factor in the outsourcing decision, all firms irrespective of headcount or financial resource (including service providers themselves) will tap into an outsourced relationship at one time or another.
There are arguments both for and against the delegation of activities. Clearly, at the heart of this is a cost/benefit analysis driven by the advice firm itself. In particular, the impact on central costs and the extent to which these are passed on to the end customer is a crucial factor. In fact, those firms which have made a significant cultural transition to a fee-based financial planning model will already have discovered that in the post-RDR environment, an ability to navigate the small print of contracts and terms and conditions is a key skill.
Indeed, the specific points of detail around outsourcing contracts are critical. In general, ‘off the shelf’ terms may not be palatable. Particular attention should be paid to liability caps (the extent to which the party providing the service will limit their liability), service level agreements and the implications of early dissolution of relationship. For those firms which are not familiar with this type of agreement it may be worth investing in an external legal expert to cast an eye over the specifics – especially where the scope and strategic importance of the arrangement is a significant initiative and investment for the firm.