Outsourcing under scrutiny: are advisers using it properly?

A big push towards outsourcing solutions was predicted post-RDR. A press on time and drive on efficiency would lead many to head towards discretionary managers, multi-asset ranges and other centralised investment propositions, it was predicted.

But, almost a year in, how have advisers been using outsourcing? A survey of 671 intermediaries, conducted in September by Skandia, reveals some interesting results. A total of 26 per cent said they outsourced investments because they do not have the expertise. It is one thing to acknowledge somebody else might provide a better service because they have more knowledge, but advisers saying they do not have the required expertise is worrying, particularly in light of the post-RDR minimum standards.

The link to cost is interesting. Almost half – 45 per cent – of advisers said it is cost effective to use an outsourced solution, while 31 per cent said it was cost effective for them. Many discretionary managers have been working hard to develop solutions to meet demand for external services, with prices becoming competitive. And the flow of multi-asset or risk-targeted solutions continues from big investment management houses.

Article continues after advert

Speaking at a Defaqto conference on outsourcing investments in October, Rory Percival, technical specialist at the FCA, said matching a client’s risk assessment to a fund profile is important when outsourcing.

“One area of concern is this mapping exercise,” he said. “What is your understanding of your client’s profile? What is the risk rating of the fund or portfolio? Do those map together? You have to make sure it is correct. By all means use risk-rated funds, but be aware of the context in which they are recommended.”

Mr Percival was asked by delegates what level of due diligence they were expected to conduct on outsourced solutions. He said advisers are not expected to go “layers and layers” down and could accept certain elements as facts, such as asset allocation and top 10 holdings. Risk “opinion”, however, is a different matter. “If a company says ‘this is a low-risk fund’, that is opinion,” he said.