Achieving efficiency in your advising practice can become a relentless quest for innovation, wrangling increasingly limited resources to produce more revenue. Wealth management firms of all sizes grapple with profit squeezing challenges like fee compression and disintermediation as well as client anxiety and awareness. However, the most difficult hurdle can be growing profits while keeping up with client demands for a more personalized experience.
In line with our commitment to supporting advisors in growing their client base, we set out over the last decade to cultivate a better understanding of how firms might call upon external resources to help with this challenge. 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%), Insurance broker/dealers (6%). The size of assets under management across the respondent pool ranged from under $50 million (27%) to over $3B (13%).
transformation of a profession
Our long-term involvement in this research topic—six surveys over ten years— allowed us to capture the evolution of the industry’s mindset. Data revealed that:
- The overall industry percentage of turning to external expertise for investment management services has remained steady over the decade, now hovering around 41% since 2010 (42%).
- Firms who adopted the practice tended to remain on that track and long-term users (10 years+) increased from 30% in 2014 to 47% in 2020.
- The percentage of respondents not currently relying on external managers and saying that their preference to not outsource won’t change has dropped dramatically – to 30%, down from 52% in 2010.
- The position of the firm in its business life cycle and advisor type can have bearing on when and how external support may be used.
Decisions to get outside support may also be reflective of increased use of the “active-passive” approach to investing. In this methodology, portfolio construction and management are overseen actively and passive vehicles are used to fulfill a large part of the investment mandate as active managers are used in specific strategic areas. Approximately 61% of firms say that their portfolio construction strategies are now fulfilled by a combination of active and passive approaches, up from 55% in 2016.
- Using external expertise as a growth strategy has not faded over the decade
- Firms are becoming more strategic in selecting areas to outsource
- The evolution of using external managers has been impacted by other industry trends
SKELETON KEY OR SCALPEL?
Our body of data indicates that the use of external support may be becoming more surgical than in prior years, with more accounts covered yet fewer activities involved. The all-accounts approach increased dramatically in popularity over the past four years to become the choice for 49% of firms, up from 39% in 2018 and 33% in 2016. In contrast, reliance on external managers for all activities, after peaking in 2012 at 50% of outsourcing respondents, has decreased just as dramatically. Only 12% of 2020 respondents reported a decision to delegate all investment management activities to outside managers.
Previously, firms showed a tendency to keep smaller accounts in house and delegate larger and more complex accounts to outside managers. However, our 2020 results show that the size of the firm seems to make more a difference than the size of the account in how external managers were used. Smaller firms were more likely to delegate all accounts to external managers while the larger firms—at least $1 billion AUM—were using outside support for smaller and newer accounts.
A firm might prefer to manage everything in-house during its nascent years. Keeping those hard-won first clients as close as possible can be a wise option, allowing these firms to get to know their base well. As the advising practice grows, it may outsource some investment activities or tactical strategies to free up resources or expand capacity quickly. When strategic priorities change down the road, the firm may reel those duties back in-house. At the largest advising firms, we see a shift toward using external expertise with smaller accounts to keep the pipeline growing while maintaining efficiency.
DELIVERING DEEPER VALUE
The diversity in the ways in which external management is deployed across the industry may indicate that looking outside isn’t the answer to all scaling puzzles. Fundamentally, driving growth can require delivering a deeper value to the client base. Achieving this goal can often hinge upon how well you understand your clients and know your firm's internal strengths in light of your client’s personal needs and goals.
For a closer look at how advisors are creating efficiencies and scaling their business, we invite you to check out our white paper, The Race to Scalability 2020: Insights from a decade of advisor research. It provides in-depth coverage of our survey results to help you understand how firms are strategizing to stay on the competitive side of a rapidly transforming industry. Also, follow our blog series to get more snapshots and insights.
Created in conjunction with Tasha Williams of TTW Consulting