As the downward pressure on advising fees and profit margin continues, advisors remain on the lookout for efficiencies that may help them stay competitive and grow their practice. Advisory firms are trying out a variety of new strategies, including offering hybrid pricing solutions, digitizing more of the client experience and offering a holistic approach to advising services.
However, advisors are fundamentally in the business of relationship building, in which success still hinges upon the ability to understand their client’s investment objectives, lifestyle goals and risk tolerance. A firm’s internal capacity for successfully lining up these client needs with the right strategic tools can play a decisive role in how or whether it taps into external resources.
Our latest research indicates that the majority of advisory firms and practices still choose to rely on their in-house competencies for investment management services—at least for now.
The Race to Scalability 2020 sheds light on how advisors decide whether and how to engage external support to grow their firms. As part of our 10-year commitment to this knowledge area, FlexShares recently talked to over 500 respondents in the advising profession, including RIAs (33%), independent broker/dealers (35%), hybrid/dually registered RIAs (13%), regional broker/dealers (8%) and insurance broker/dealers (6%). The size of assets under management across the respondent pool ranged from under $50 million (27%) to over $3 billion (13%).
Shifting Perceptions and the Future of Outsourcing
Our data shows that the majority (60%) of advisors decide not to engage outside investment expertise. The percentage has not varied much across six surveys over the decade. However, the research also indicates that industry perceptions may be changing.
The percentage of nonoutsourcing respondents saying their opinion of outside investment management “won’t change” has dropped dramatically—to 30%, down from 52% in 2010. Furthermore, the pandemic has encouraged firms that do not currently outsource to reassess their approach. When firms that handle investment management in-house were asked whether their opinion of outsourcing has changed as a result of the pandemic, 15% of respondents said they planned to increase usage of outside managers and 85% said they plan to reconsider the use of external management. While the pandemic has not triggered a significant shift towards third-party investment outsourcing to date, it’s a growing consideration.
Supporting this shift in opinion is a growing number of advisors who indicated that investment management is not their primary value proposition. This is likely reflective of the evolution in advisors’ expected role from investment manager to holistic financial planner. Nearly a third—33% in 2020—of respondents told us they saw investment management research as their primary business proposition. Slightly higher than 32% in 2018, the percentage has been on an overall decline—from 54% in 2012, 56% in 2014, 44.6% in 2016.
As the landscape for outsourcing evolves, there were also several factors in the survey that could point to future adoption. Nearly half of 2020 respondents who didn’t outsource revealed that more affordable solutions for investment management options would make them reconsider their standing decision. The availability of a user-friendly technology platform and a broader range of outsourced investment management solutions essentially tied for second, at around 24% of respondents citing each factor.
Furthermore, advisors aren’t opposed to seeking third-party services more broadly. One hundred percent of advisors who keep their investment management function in-house outsourced at least one non-investment area—most outsource more. Advisors are increasingly relying on external help for services such as investment product analysis, up to 66% in 2020 from 57% in 2018, reflecting advisors’ desire for support in investment selection. There is also significant growth in outsourcing their marketing function, up to 39% in 2020 from 20% in 2018. Finally, 60% of advisors indicated they rely on external help for information technology services.
External support might not be a fit for every scaling challenge or every advisor. Our survey data suggests that boutique firms might find it easier to focus on their core value proposition by keeping the business simple and the clients close. Clients with a larger client base may have more leeway to explore new products and verticals, offloading their areas of inefficiencies. But no matter the firm size, advisors may increasingly find value in leaning on external resources to spend more time creating a memorable experience for clients that consistently meets their goals.
Laura Hanichak Gregg is director of practice management and advisor research at FlexShares and host of The Flexible Advisor podcast.
