Choosing an ‘outsourced’ investment solution


    Over the past couple of years, financial adviser resources have been squeezed to the extent that a number have decided to look to outsourcing solutions for investments for some clients. There are two main reasons for this trend.

    One is that, post-RDR, new research and compliance requirements have increased and at the same time product providers have come up with an increasing number of products, often more complex solutions.

    Add to this the increased cost needed in terms of governance and regulatory compliance, and it can be cheap and arguably safer to outsource the investment function to a third-party specialist.

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    When advisory firms consider outsourcing their investment propositions, they can look at a number of options, such as multi-asset funds and discretionary solutions, and even multi-asset funds with a discretionary service attached to it.

    In some cases they are seeking a ‘centralised’, or standardised, solution for lower-value clients to manage risk cost-effectively; in others a more bespoke solution is being sought that caters to the needs of higher-net worth customers.

    The main reason for choosing a multi-asset over a discretionary solution is that multi-asset funds usually require much lower minimum investment sizes, often £1,000 or less, and fees are generally better expressed.

    Beyond this, there can be other, more subtle differences between the two, so much so the lines between the two could be said to be blurring.

    A flexible solution

    The idea behind investing in a collective is that investor monies are pooled together and everyone benefits from the same investment portfolio. This very simple notion is at the heart of making sure that each client segment has basically the same portfolio and that investment decisions are applied consistently and at the same time.

    Pooled monies often give investors access to solutions that require larger minimum commitments than an individual of the investor group would have been able to afford - and the manager of the pool typically has more power to negotiate costs and fees, which are then shared out among the investors.

    Multi-asset funds give advisers an outsourcing solution that can be deployed across a variety of client segments, with multiple charging points, enabling ring-fencing of assets and providing access to a compensation scheme.

    Of course, if an adviser decides to ‘outsource’ to a multi-asset fund they need to be confident that it does what it says on the tin. In other words, adviser cannot choose a fund for its name or managers’ reputation alone, they need to do detailed due diligence and see whether the fund has delivered on its promise.

    Empirically, this means delivering on the stated investment mandate. Consideration should be given to the cost structure as charges can be higher with multi-asset funds. Picking multi-manager funds, which adds a best-of-breed sub-advisory element to the proposition, also comes with an extra layer of charges.