Is the adviser investment outsourcing debate dead?

A press release I received today (15 October) from research company Defaqto proclaimed that we are indeed seeing growth in adviser outsourcing, with a survey of 452 advisers suggesting 45 per cent are now outsourcing some or all of their investment function.

Behind the headline hubris, the rise the research points to is just 3 percentage points compared to the 42 per cent of 345 respondents that said they outsource at the end of 2011. A rise of 3 per cent in 18 months is hardly evidence of a rush to outsource.

We’ve done our own research on this and, save for the overall percentages being a little lower, the trend is a broadly similar picture of stability. At the end of September, 36.2 per cent of 533 advisers said they would outsource some or all of their investment function, identical to the percentage of 409 advisers that said they would do so as at January of this year.

Delving into the numbers a little deeper, the FT research showed a slight increase in the number that are now outsourcing all of their investment management between January and September from 9.5 per cent to 12.6 per cent.

This is where I think the lines become blurred. Of the 23.6 per cent that outsource ‘some’ of their investment function, many are simply using multi-manager funds or other collective investment ‘solutions’ either within some portfolios or for certain (probably lower-value) clients.

Is this really what was meant by outsourcing, which was being used to refer to those advisers that were seeking to offload the responsibility for investment decision making due to increased research and due diligence demands and the requirement to ‘advise’ on a wider range of options?

This was supposed to be especially true of independent advisers, which according to our research still dominate the market. At the end of September the data show 75.9 per cent of advisers were IFAs, compared to 75.6 per cent in January.

Financial advisers have significantly more options available to them and it is widely recognised that the selection process is now more complicated and demanding, but it is equally true that the regulator will not allow them to abdicate responsibility.

For many the solution is to focus on client suitability and take a segmented approach, offering some appropriate collective solutions for some clients or to use within certain portfolios and generally placing greater emphasis on the fundmental tenets of asset allocation.

Fraser Donaldson, insight analyst for wealth management at Defaqto, said that essentially there are two core solution types: managed funds or segregated portfolios.

He said: “Under funds there are several subsets, but the ‘managed’ solutions tend to be multi-asset and/or multi-manager (whether ‘fund of funds’ structure or single manager).

“Segregated portfolios tend to be run by discretionary managers and investment houses either directly or indirectly. There are of course subsets within this high level taxonomy, and it is important to understand the subtleties and differentiators. Terminology itself is adding to the jungle of available outsourcing options.

“From understanding the broader investment outsourcing universe to selecting specific partners, there is a great deal for advisers to consider when looking to use investment management specialists.”

There is no doubt that risk-rated multi-manager and multi-asset ranges have flourished in the post-RDR world.

Data published around six weeks ago showed that fund-of-funds ranges from Standard Life and Axa are the most popular. The former’s MyFolio range recorded inflows of roughly £460m in the six months to August, according to FE Analytics estimates, and £750m in 12 months. Axa’s Architas multi-asset range has brought in approximately £180m in six months.

In my view what all of this shows is that the market is changing and, importantly, segmenting. But it also shows that to place this into a grand narrative around a widespread move to ‘outsourcing’ offers little insight and actually potentially obfuscates the underlying drivers of change.