Talking Point  

Who bears the risk when outsourcing?

  • To understand why outsourcing has become popular.
  • To learn how this might affect risk and responsibility.
  • To ascertain how to demonstrate TCF in investment advice while keeping costs low.
Who bears the risk when outsourcing?

Outsourcing investment work is now commonplace across the financial advice profession.

According to Schroders, last year more than half of financial advisers delegated the task of looking after client portfolios to asset managers.

A separate survey, conducted by consultancy firm threesixty, put this figure closer to 90 per cent.

Many in the trade, regulators included, claim that this shift to outsourcing makes perfect sense, mainly because it frees up advisers to focus on their core skill of financial planning and leaves the arduous job of asset allocation to experts with far bigger resources. 

It also helps advisers to satisfy gruelling regulatory requirements. While most financial planners are qualified to pick investments on behalf of clients, sweeping regulatory changes mean these choices are increasingly coming under greater scrutiny.

According to James Rainbow, head of UK financial institutions at Schroders, a big driver for outsourcing was the advent of the centralised investment proposition regime (CIP) and the requirements it puts on advisers.

He says: "Ensuring that an adviser has a clear process and that it can consistently be applied across advisers in the same firm can be challenging if advisers are effectively picking funds on behalf of their clients.

"Clearly there are governance challenges with outsourced relationships of any kind but the general rise in professional standards for investment selection (both in and outsourced) is a good thing for clients."

However, not everybody agrees that outsourcing ultimately favours the client. Most of this distrust has been aimed at discretionary fund managers (DFM), which generally take care of all day-to-day investment decisions – and have historically charged a fortune for doing so. 

Plenty of advisers have grown tired of rules forcing them to keep evidence of every single decision –- and seeing investments go up in smoke because clients forgot to respond to a letter requesting their authorisation to sell holdings ahead of the rest of the market.

DFMs offer to ease these rather large headaches, but do not always come cheap. 

The other main alternative, model portfolios, have similarly attracted a fair amount of criticism. Although much more affordable than bespoke DFM services, these pre-constructed investment funds, targeted to meet a specific risk profile and mandate, have been lambasted by some in the profession as another way for financial advisers to shoe-horn clients into any old one-size-fits-all vehicle.

These various observations have sparked plenty of interesting debates across internet forums. In a heated exchange on one website, several advisers agreed there is little point in clients paying an IFA for personal advice if all the important decisions are going to be outsourced.

Another added that the idea of losing his most lucrative source of revenue – managing money on a regular basis – is baffling, especially as his clients really value their quarterly updates. 


Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Which regulatory regime does Mr Rainbow suggest gave rise to the trend of outsourcing?

  2. How does Mr Milton say portfolios with daily oversight can compensate investors?

  3. What does Mr Patel prefer to use?

  4. Who does Mr Beer say is on the hook for managing a portfolio within a set mandate?

  5. Why does Mr Gibson believe outsourcing can be too expensive for clients?

  6. A different Mr Gibson believes there is little value left in advisers dedicating endless hours of their day to picking funds. True or false?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • To understand why outsourcing has become popular.
  • To learn how this might affect risk and responsibility.
  • To ascertain how to demonstrate TCF in investment advice while keeping costs low.

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