Talking Point  

Why advisers are outsourcing

  • To understand what is driving outsourcing.
  • To be able to negotiate the adviser/DFM agreement better.
  • To ascertain the various aspects of suitability and risk that comes with outsourced investment solutions.
Why advisers are outsourcing
Advisers are increasingly outsourcing investment decisions

Why advisers are outsourcing

Advisers are increasingly outsourcing investment decisions

KickerThis is a kicker.

Outsourcing investment decisions has become more popular among advisers over the past decade. But what are the drivers behind the rise of outsourcing to a discretionary fund manager \(DFM\) or to multi\-asset fund managers, and will these drivers continue to push more advisers towards using outsourced models for clients? This special report highlights some of the issues advisers face when it comes to choosing how to, or whether to, outsource investment decisions to clients. It also looks at the adviser\-discretionary\-client relationship, the advantages in terms of time/cost efficiency for advisers and the potential impact that ongoing regulation may have on advice and the trend to outsource investment decisions.

Cost and suitability at front of advisers' minds when outsourcing

Outsourcing investment management has become popular with advisers over the past few years but costs and charges are the biggest concerns, research has found. According to a poll taken among FTAdviser's readership, 46 per cent of advisers said costs and charges presented the biggest challenge when it comes to investment outsourcing. Some 31 per cent were worried about suitability and making sure the investment proposition and portfolio was appropriate for individual clients, both at the point of recommendation and throughout the lifetime of the investment. Mifid II and other regulatory concerns pressed home for 19 per cent of advisers and only 4 per cent believed the performance and track record of the discretionary fund manager was something about which they should be worried.

Yet one of the drivers towards outsourcing from an advice perspective is the ability to delegate to professional investment managers parts of a client service, such as portfolio management, which then allows advisers to focus more on the client relationship, which is seen as a real value\-add for clients. Lawrence Cook, director of marketing and business development for Thesis Asset Management, a discretionary fund management company which provides outsourced fund management services to advisers, said clients valued the advice relationship and were willing to pay for that. He said: "Again and again, clients say in surveys the things they value most are not the things that advisers like to outsource, such as the portfolio management. "Clients value trust in the adviser, a person they can speak to, someone who understands them and makes financial matters understandable. "Therefore it is not surprising that IFAs are outsourcing to allow them to focus on the things clients value and ergo are willing to pay for." This comes after [financial advisers told FTAdviser](\-costs\-weigh\-on\-advisers\-minds/) they were worried that cost was a big obstacle when it came to choosing whether and where to outsource a client's investment portfolio. Earlier this week, Ben Willis, senior investment manager for Whitechurch Securities, said advisers often saw "outsourced solutions as adding fees onto the client, while struggling to justify why they are still charging their fees."

CPD: What has been driving advisers to outsource?

Spotlight on outsourcing investments

**Advisers have been increasingly using outsourced solutions for their investment clients. What are the drivers behind this and how might this trend develop?** Outsourcing investment management of portfolios has been gaining traction among advisers for many years. One of the main reasons for this, according to Lawrence Cook, director of marketing and business development at Thesis Asset Management, is regulation. The retail distribution review \(RDR\); the scrutiny on discretionary portfolios, suitability and risk profiling coming from the Financial Conduct Authority; and the Markets in Financial Instruments Directive \(Mifid II\) have all helped to hammer home the message that clients with similar requirements must get similar outcomes. To do this requires consistent processes and systems, Mr Cook says. However, implementing them without having discretionary permissions is very hard, so outsourcing largely solves this problem. Gary Kershaw, group compliance director for SimplyBiz, says that competence and the demonstration of this goes hand\-in\-hand with the regulatory requirements. As a result, this is also putting more pressure on advisers to choose an outsourced model for their investment clients. Mr Kershaw explains: There is a need for advisers to hold specific qualifications and, although the qualifications and requirements themselves may change over time, the impact of taking them does not. For example, in terms of occupational pension transfers or long\-term care, advisers must not only hold the relevant qualification but also demonstrate competence in these areas. If, therefore, you are a newly qualified adviser, it is not a given that you can immediately commence advising, as gaining the experience is often harder than passing the examination itself. These barriers to entry are driving firms to look at the referral route and unless there is a softening of these rules, I can only see this increasing. He adds that while advisers do have the necessary qualifications and experience, more advisers are choosing to refer rather than manage portfolios in house. **Economics of advice** Regulation isnt just a stick, however, driving advisers to consider using a discretionary portfolio manager or choosing to use multi\-asset portfolios on platforms. As Barry Neilson, chief customer officer for platform Nucleus comments, there are positive drivers, not least the fact advisers using an outsourced investment solution are finding it more beneficial in terms of adding value to the client relationship. Advisers are getting exceptionally busy and having to think about their business processes differently, he says. They are beginning to think long and hard about how they add value to their clients. In the old days, the focus was on investment and product selection. Today, advisers add value through understanding clients lifestyle aspirations and personal requirements. Its more about financial planning and coaching, rather than products. Therefore, according to Mr Neilson, to enable themselves to focus on this more, advisers are looking to outsource different parts of their proposition and the investment management is an obvious one because of its complexity.

> Outsourcing provides the breathing space to focus on financial planning, not administration.

Many advisers feel an experienced investment professional is better\-placed than they are to help clients on investment selection, says Mr Neilson. Mr Kershaw agrees: Many advisers are telling us they are choosing the referral route rather than doing it in\-house. Outsourcing to specialist DFMs decreases the burden of resources required for investment management and selection, says Andrew Denham\-Davis, business development director at Brooks Macdonald. Mr Denham\-Davis continues: It also provides efficient access to investment research and, possibly, brings more efficient engagement with time\-saving technology such as CRM systems. In short, an effective partnership should enable advisers and DFMs to focus on their specialist areas of expertise for the ultimate benefit of our mutual clients. **Operating frameworks** Mr Denham\-Davis comment about working together and mutual clients is not one that should be glossed over. According to David Gurr, director of Diminimis, one of the big drawbacks when it comes to advisers choosing to refer a client to the investment management services of a DFM is that advisers do not often check the terms of their agreement with the DFM. This means they and their clients might not always be getting the best possible deal in terms of a great working relationship between the DFM, adviser and client. Moreover, he warns that when regulated entities are working together to provide a service to the underlying investor, the responsibilities of each party must be made crystal clear, as this has implications in terms of accountability and responsibility for the adviser firm. Mr Gurr explains: The whole industry has misunderstood a lot of the basis of the operating frameworks. Its not just a question of getting the right paperwork in place: advisers and clients must have legal certainty of the services being offered and in what capacity the adviser is working, especially if the adviser is working as an agent with fiduciary responsibility for the clients money. Moreover, when you have two regulated entities the DFM and the adviser working together, they both have duty of care to the client. This is also misunderstood. Because of this, they should work closely together to ensure the suitability of the investment solution to the end client, in a way that is efficient, productive and with an interface that is as robust as you can make it. However, too often advisers simply sign the agreement without negotiating or even reading it. Mr Gurr says during a series of seminars he held a couple of years ago, he asked approximately 300 advisers attending whether they had read all of the intermediary agreements given to them by DFMs, and only two said they had. Given that Mr Gurr has seen at least 16 different types of outsourced frameworks being established by DFMs, he says it behooves advisers to discuss and negotiate before signing on the dotted line.

> Advisers will remain the conduit through which all clients needs are addressed.

He says: You can negotiate a service and advisers need to be looking at the operating framework and the suitability matrix. There is scope to negotiate and advisers need to push back more, as otherwise the adviser will be totally exposed. Post\-RDR and post Mifid II this is especially the case, as advisers will need clarity over who is responsible if something goes wrong, and the client needs to know who is looking after their financial interests. Just as an analogy, he adds, if an adviser acts as client with a fiduciary duty to the underlying investor, they need control and oversight of decisions being made within a DFM. If they are putting tens of millions of client money into DFM arrangements without doing proper due diligence, it is like buying a house on the back of an estate agents particulars. As Thesis Asset Managements Mr Cook states: Outsourcing is not a one\-size\-fits\-all \[service\] and advisers are discovering that, when they talk to asset managers, they can find a service that either fits off\-the\-shelf or something designed very much to the requirements of the adviser firm. **In good hands** Moreover, there is a concern that a DFM might seek to poach the client although Mr Gurr says this is rarely the case in reality and therefore an adviser should make sure there are proper introducer agreements in place. This point has been raised by Mr Kershaw, who opines: A robust introducer agreement, including a non\-compete clause, will ensure your existing relationship will be protected from a legal perspective. But I believe rather than weakening your relationship with clients, outsourcing can only strengthen it, as advisers will remain the conduit through which all clients needs are addressed, regardless of whether or not they fall into business areas in which you yourself have elected not to advise. This is why it is important for advisers to check the terms of their business arrangements properly with a DFM and negotiate in the best interests of both the adviser and the end client. Mr Kershaw also advises to check, check and check again when it comes to ascertaining the risk of introducing clients to outsourced suppliers. This goes beyond the mere due diligence: he suggests speaking to previous clients and other advisers who worked with that supplier, to make sure an advice firm has a full understanding of how the service provider will work with your client". If you still dont feel sure your client will be in good hands, then do not make the recommendation. **Cost and clarity** Other potential concerns that have been raised include cost, as post\-Mifid II, the breaking\-out of all aggregated costs and charges on a clients investment portfolio might give rise to questions over why the adviser has suggested putting the client's money into a DFM service via a platform. Mr Neilson explains: Advisers need to consider the impact of fees. In a low\-return environment, the overall cost to clients of advice, the platform and the investment solution may begin to look top\-heavy, so advisers need to manage this. Weve seen some advisers who liked the theory of outsourcing to a DFM but after crunching the numbers, they have realised the DFMs arent necessarily generating the higher returns than the advice firm itself was generating. So, in that case, what is the client paying for? Mr Gurr adds: There is a perception that DFMs can be expensive but these additional costs are coming down. In particular, if you look at some of the services that can be provided by robo\-advice, for example, those DFMs using technology well to keep costs down and deliver an enhanced service will help keep fees under control and improve efficiency. **Forward look** So what might be in store in the years to come? Certainly there will be more regulatory scrutiny, as far as Mr Denham\-Davis is concerned. He comments: New regulations have already had implications across the industry and regulatory changes will affect a number of aspects of private client investment management.

> In a low\-return environment, the overall cost to clients of advice, the platform and the investment solution may begin to look top\-heavy.

This means both advisers and the DFMs to whom they outsource will need to meet more stringent requirements. Such requirements could include: 1\) Frequency of reporting. 2\) Suitability. 3\) Data protection. 4\) Costs and charges. Tougher requirements has been reiterated by Mr Kershaw. While there is no single piece of regulation on the horizon at the moment which specifically relates to outsourcing, regulatory change can affect the prevalence of outsourcing among advisers. I imagine regulation will continue to hasten the growth of the number of advisers now choosing to outsource. Mr Denham\-Davis adds: For advisers, this will increase the need for a robust, structured due diligence process, and opportunities for successful partnerships with DFMs, where complementary skills and expertise can work in combination to achieve the optimum outcome for clients. I anticipate more movement from IFAs towards DFMs, says Mr Gurr, especially as technological advances make DFM services cheaper and more efficient. Mr Cook agrees: Advisers are now keener than ever to ensure clients receive the service they sign up for. If the IFA proposition says for the adviser charge a client gets a full annual review, then the adviser needs to ensure they have the scope to do so. Outsourcing provides the breathing space to focus on financial planning, not administration. And for Mr Neilson, it all comes back to due diligence and making sure that, in the future, the DFM recognises the underlying needs of individual clients. He concludes: The onus is on advisers to have a process for clients that are not suitable for DFMs, and to put appropriate, alternative investment solutions in place. **Simoney Kyriakou is content plus editor for FTAdviser**

House View: Joe Tennant, product manager at Schroders, explains how multi\-manager can help clients needing an outsourced investment solution.

To misquote Ronald Reagan: surround yourself with the best people you can find, delegate and dont interfere. Sound advice and many advisers have taken this to heart when it comes to investments, choosing to outsource rather than take it on themselves. Reaching this decision seems to be the easy part; its deciding whom to give this responsibility to that throws up the bigger challenge. For many, multi\-manager/multi\-asset portfolios are considered the best fit, and its easy to see why. A key driver for many investors is the tax incentive. Put very simply, a multi\-manager/multi\-asset strategy does not have the issues of either capital gains tax \(CGT\) or VAT, which affect Discretionary Fund Managers and Model Portfolio Services respectively. The CGT is particularly important as it allows the managers to rebalance the portfolio whenever they consider appropriate, without needing to consider the tax implications of the underlying funds.

> No two clients are the same, so having options and a level playing field from which to choose is important

Whilst undoubtedly a tax benefit, it also makes the fund manager more accountable as they focus their investment decisions solely on delivering on the funds objective, rather than letting the tax tail wag the dog, so to speak. This accountability is further enhanced by the simple fact that, being a unitised solution, they can be directly compared to their peers. This is something that investors find particularly appealing, as it allows them the relatively simple task of seeing how their fund choices line up vs. the rest of the sector. Taking the sector analysis one step further enables the adviser to identify specific investment styles and approaches, and blend them together, effectively accessing large teams of experienced investors. It would be impossible to replicate this level of resource when building client portfolios themselves. A further area of consideration is fees. There has been considerable downward pressure right across the outsourcing spectrum, resulting in lower charges to the end investor. Multi\-manager funds have been no different, with recent fund launches such as the Schroder Dynamic Planner fund range providing a risk\-managed fund of fund solution with a capped fee of just 0.99 per cent. The industry is evolving fast, driven by regulation and the greater desire for transparency and value for money its hard to argue with the logic. The result has been a surge in outsourced solutions, which only serve to provide the adviser with more tools and choices. No two clients are the same, so having options and a level playing field from which to choose is important: multi\-manager/multi\-asset, DFM, MPS; it is a crowded market yet they all play a role. **Important Information** _For professional investors and advisers only. This document is not suitable for retail clients. These are the views of the Schroders Multi\-Manager Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd \(Schroders\) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 \(as amended from time to time\) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored._

[Bank your CPD here](\-advisers\-are\-outsourcing/)

Advisers have been increasingly using outsourced investment solutions for their clients over the past decade.

Whether they are choosing the services of a discretionary fund manager (DFM) or using multi-asset solutions, more financial advisers are considering handing over the daily job of managing money to professional investors, so the adviser firm can focus on the client relationship.

But what sort of challenges and opportunities does outsourcing investment decisions really bring? With the Financial Conduct Authority keen to make sure that suitability and risk-appropriate investments are kept to the forefront, what sort of decisions do advisers need to make about the manner in which they outsource, the operational framework they agree to and the arrangement they enter into with the discretionary fund manager?

This article, which qualifies for an indicative 30 minutes' worth of CPD, aims to explore the pros and cons of outsourcing and explain how advisers choosing to outsource need to negotiate better with DFMs and communicate more clearly with the client.

Contributors of content towards this guide: David Gurr, director for Diminimis; Barry Neilson, chief customer officer for Nucleus; Lawrence Cook, director of marketing and business development at Thesis Asset Management; Gary Kershaw, spokesman for SimplyBiz; Andrew Denham-Davies, business development director at Brooks Macdonald; the Personal Finance Society's Good Practice Guide on research and due diligence for advisers using DFMs.

Simoney Kyriakou is content plus editor for FTAdviser


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. What is there a need for advisers to hold now, according to Mr Kershaw?

  2. What does Mr Neilson say an outsourced solution adds to a client/adviser relationship?

  3. What does Mr Gurr say is one of the drawbacks with using an outsourced solution?

  4. How many different types of operating frameworks does Mr Gurr say he has come across?

  5. What does Mr Kershaw advise advisers to do?

  6. What does it all come back to as far as Mr Nielson is concerned?

Nearly There…

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

You should now know…

  • To understand what is driving outsourcing.
  • To be able to negotiate the adviser/DFM agreement better.
  • To ascertain the various aspects of suitability and risk that comes with outsourced investment solutions.

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