What sort of client or work can be outsourced?

This means a lot of mid-stream consumers – those with low to middle-sized portfolios by value – are likely to be the bulk of the client bank. But as these clients tend to have less specialised advice needs, the work done to service this segment has become less remunerative.

Rather than ditch these clients as some national adviser firms did after RDR, advisers have tended to look for a managed portfolio service to which it can outsource lower-revenue-generative clients.

Mickey Morrissey, head of distribution for Smith and Williamson, explains: “With advisory firms increasingly segmenting their client banks, intermediaries often use a managed portfolio service (MPS), accessed through an investment platform, for their lower-net worth clients.

“For traditional balanced growth type clients, without any capital gains issues, outsourcing to an investment manager in this way could be ideal.”

There is no one-size-fits-all and a range of clients could benefit from using an MPS. Mickey Morrissey

He says that by using an MPS for lower-net-worth clients, intermediaries will have more time to spend with their higher-net-worth clients, and those with more complex financial planning requirements.

Differences

Not all client business will need to be outsourced and not all clients will want to be outsourced as they have particular investment needs.

Indeed, as Emily Booth, senior investment manager for Parmenion Investment Management, comments: “There is no easy answer to this question as every adviser and every client is different.”

Of those who are happy to have their investment portfolios outsourced to a third party, some may be comfortable with an off-the-shelf solution that suits their basic investment needs, while others – maybe the higher net-worth – want something bespoke to them.

Some investors may want to have more control over investment decisions and be able to make decisions themselves.

Other investors may have had hotch-potch portfolios collated over time on do-it-yourself platforms, such as Hargreaves Lansdown’s Vantage, and now want to have someone else do the monitoring and asset allocation decisions for them.

Peter Mullins, head of business development at European Wealth, opines: “Suitable clients would include those with little time to be involved in the day-to-day management of their investments.

“For example, a DFM may be suitable for those who want to have changes to their portfolios carried out speedily, whether because of a change in economic or market conditions, or indeed because of their own attitude to investment risk and circumstances.”

Mr Morrissey admits: “There is no one-size-fits-all and a range of clients could benefit from using an MPS.”

The question should always be on how suitable that MPS is for an individual client, and whether the DFM running that MPS is a good fit.

Cost

Cost can be a consideration, as on top of the financial adviser’s remuneration, the client will also have to pay a fee for the DFM, which may or may not include any trading costs or stamp duty incurred as a result of ongoing portfolio management.

So while it may seem cost-effective for an adviser to outsource lower-net worth clients to a managed portfolio on a platform, it might not always be cost-effective to the lower-net-worth client.

Therefore, according to Mr Mullins, a DFM solution should also be considered only for those clients who “are prepared to pay an additional fee for active portfolio management”.

Even so, costs in the asset management industry have been coming down since the RDR, and, as Lawrence Cook, business development director for Thesis Asset Management, explains, the idea that a DFM is necessarily exorbitantly expensive is a “myth”.

There is no easy answer to this question as every adviser and every client is different. Emily Booth

He says: “Is the cost of a DFM worth it? It is a myth that DFMs make for a more expensive service.

“For example, clients can access discretionary services, including platform nominee, client reporting, investment management and dealing for less than 1.1 per cent a year directly, and 0.7 per cent a year on wraps.

“This could be even less if clients choose a passive option.”

Therefore it is always worth the adviser shopping around to find a more cost-effective MPS solution if the adviser wants to outsource lower-revenue clients towards a managed service.

Hybrids

There are varying degrees to which an adviser can outsource investment decisions, however, and technology has enabled more flexibility for advisers and their clients.

Ms Booth explains: “Clients can choose what level of DFM they wish to receive. As well as traditional, full DFM relationships, advised clients can partner with us to build their own solution.

“Also, advisers who have their own discretionary service can choose to simply use a provider as a technology and administrative solution.”

However an adviser chooses to use a DFM for his or her clients, the important thing, as Ms Booth comments, is to “engage with the right partner in the right way".

“This lets the adviser focus on what they do best: giving advice and building relationships.”

simoney.kyriakou@ft.com