InvestmentsJul 6 2017

The rise of outsourcing

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The rise of outsourcing

These are as applicable to the world of investment management as they are to any other form of outsourcing, and are often cited as part of the reason why advisers choose to outsource to a discretionary fund management (DFM) partner.

According to Rohit Narang, chief operating officer for Intelenet Global Services, “cost arbitrage” is a big factor – perhaps the most pressing one.

He explains: “Cost arbitrage is a big factor, as it could mean customers receive a better service for the same or even lower cost.

It is smart for advisers to lean into the resources accessible by DFMs.Emily Booth

“For example, a financial firm may find they can engage the services of fully qualified chartered accountants for the same cost as hiring recent graduates, thanks to outsourcing.”

In addition, the human resource needed to be able to manage investments in-house can also be prohibitive in terms of cost and administration. 

Mickey Morrissey, head of distribution for Smith & Williamson, says: “There is a considerable amount of research required to run this sort of proposition, which although a necessity, can become a burden for time-poor intermediaries.”

Emily Booth, senior investment manager for Parmenion Investment Management, comments: “It is smart for advisers to lean into the resources accessible by DFMs.

“To achieve the regulatory permission to manage on a discretionary basis, their staff will have to maintain extensive investment expertise, after passing the necessary qualifications.”

Technology

Mr Narang believes the rapid pace of technological innovation means staying on top of new developments has become “imperative” for business success. 

With the rise of artificial intelligence, robotics and automation, firms which cannot compete technologically will find it difficult to compete in terms of investment management and ease of access for clients. 

Therefore it would make sense to outsource investment management to companies whose pockets may be deeper, and therefore better able to cover the cost of up-to-the-second technological innovation.

According to Ms Booth: “The right DFM partner can also offer the adviser support for other areas, such as technology and risk control.

“This can benefit clients who are becoming more technologically enabled. Consumers of all ages want to be able to engage with their adviser through a variety of channels, including monitoring performance and engaging with their investments and adviser online.”

Globalisation

To be truly diversified, it is not just enough for some high-net worth clients to be given a choice of funds from the best in the UK; they also might want access to some of the world’s best fund managers.

Many smaller IFA firms would not have the means to research such fund managers, whereas a larger DFM or investment management boutique would not only have the resources to commit to such research, but also might have offices in other countries, enabling them to monitor market movements round-the-clock.

According to Mr Narang: “Outsourcing allows firms to follow the sun, establishing a 24-hour business operation to meet customer demand.

“Becoming truly global can be a highly difficult evolution for firms to carry out on their own.”

Furthermore, DFMs are often more likely to have nominee accounts with some US or institutional managers the average UK retail investor would just not be able to put into their portfolio.

Ms Booth says: “The buying power of the discretionary manager means economies of scale, and access to lower-charge funds.”

Although outsourcing to a DFM does carry a charge for the service, which may have put some advisers off in the past, Mr Morrissey comments: “While this does create an additional charge, using a managed portfolio service (MPS) can save advisers money on the underlying costs of collectives.

“This is because firms have the buying power to buy cheaper share classes.”

To this point, Peter Mullins, head of business development at European Wealth, adds: “The additional tier of advice obviously comes with an additional cost to the client, but advisers also have to justify what they charge the client, and what it is for.

“If their fees include charges for portfolio management, are they actually doing it, or are they just accessing various managed funds?”

Regulatory change

For financial services firms, regulation – in particular the Retail Distribution Review – has been the main impetus for outsourcing investment business.

“The regulatory burden faced by advisers today is significant and unlikely to reduce,” says Ms Booth. “As advisers who keep the reins of fund-picking face more and more regulation, this requires them to produce documentation of their decision-making process, and their business risk increases.

“Choice and variety when it came to investments used to be a positive but now it is a risk. Using a discretionary solution can release advisers from a significant administration burden, and allow them to spend time with their clients, offering advice or on business development.”

By removing the need to maintain the in-house solution, the IFA can add new clients, with much less operational strain needed.Lawrence Cook

Lawrence Cook, business development director at Thesis, agrees: “The improved profitability comes from opportunity cost, and cost to serve.”

He outlines these as follows:

Opportunity cost: when not running a DFM, the advisor must commit to work to support the investment solutions he is running. This work is likely to mean: 

  • Research
  • Updating the advisory model on firm’s systems.
  • Updating the individual client portfolio.
  • Administration requiring client interaction. 

Cost to serve: This is a cost to the business. Mr Cook explains: “In many advisory firms, the cost to serve is not calculated, or at least it is hard to specify, but nevertheless, the work is there. 

“The challenge with any services work is that it is largely invisible. Accepting the current cost to serve drives advisers to focus only on revenue, when there is often scope to improve the revenue by focusing on cost-to-serve ratios.”

Client care

Lastly, some advisers are choosing to use DFMs as this can potentially grow the business with new clients, as well as enhance the client care and relational aspect of advice. 

According to Mr Cook: “By removing the need to maintain the in-house solution, the IFA can add new clients, with much less operational strain needed. 

“By removing the administrative burden through outsourcing, there is proportionately more time available to spend on issues that matter to clients. Value means happy clients and clients who are happy to pay fees.”

simoney.kyriakou@ft.com