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How to decide whether to ‘outsource’ client investments


    The Retail Distribution Review has changed the adviser world like no other regulatory change in the past.

    Almost overnight many advisers had to move from a world where fees were packaged into investment plans (commission) to one where fees are charged for advisory services quite separately from the product, fund or platform charge. In addition, the Financial Conduct Authority’s transparency rules require that such fees are clearly separated from platform or product charges.

    However, when looking at the impact the RDR has had it is sometimes easy to forget that the fundamentals of advisory businesses have not changed. Client requirements and the adviser’s investment proposition remain core.

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    Therefore, when advisers conducted their internal reviews, brought on by the RDR, they would have included detailed client segmentation and profiling in order to establish which investment propositions would be most suitable for particular clients or client segments.

    Firms will then have looked at their own resources to establish whether all propositions could be provided in-house. Where the decision was taken that they could, the firm still needed to make a call on whether it would elect to appoint a third party to carry out any research and due diligence.

    Some firms will have decided that for certain client segments, or in some cases for all clients, particular propositions would need to be ‘outsourced’ using solutions provided by third parties - of course the selection of full outsourcing partners would still require comprehensive due diligence before any appointment is made.

    In a recent Defaqto survey, we found that many advisers now outsource or are looking to outsource their investment proposition. In fact, 45 per cent of advisers are currently outsourcing elements of their investment process for at least some clients. The market response to this is the evolution and growth of an almost bewildering range of options for advisers as investment managers compete for client funds of all sizes.

    In all of this it should be acknowledged that both keeping investment processes in-house or outsourcing can work equally well, but it is important to have a full appreciation of what is involved in building and maintaining an in-house client investment proposition.

    The case for outsourcing

    Outsourcing can typically bring a series of benefits to an adviser firm, including:

    A) Business benefits:

    • Greater efficiency

    • More options

    • Lower business risk

    Outsourcing can bring greater efficiency for the adviser’s business and provide adviser clients with access to much wider skill sets and therefore a wider range of options to the firm and its clients.

    When sharing the workload, the adviser should find that business risk is lower, although it needs to be emphasised that the responsibility for the client portfolio remains with the adviser – you cannot outsource liability and the selection of any third-party requires full due diligence.

    The graphic below shows where investment outsourcing sits and its scope within the fund-related advice process.