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How Firms Are Scaling and Keeping Investment Management In House

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As advisors plan to grow their businesses, many are seeking to efficiently scale their business so that they can substantially increase revenues without increasing work hours or costs (for new employees, operating expenses, etc.). Making things easier for you and your firm might be helpful. However, be sure to keep your clients’ needs and preferences in mind as you make changes to gain efficiencies. Will the changes you implement help or hurt the client experience? Clients want an experience that is simple and clear for them and they may be willing to pay more or recommend your business to others in exchange, according to market research.

Uncovering efficiencies for the firm that also help clients can invigorate profits. Some firms rely on in-house competencies to meet this challenge. Other firms may choose to expand their capacity by outsourcing functions they once handled in-house. In line with our quest to find out what firms expect and receive from using external investment expertise, we have been asking advisors about their business needs, growth, and the activities they focus on to achieve value .

FlexShares has dedicated 10 years to the study of how advisory firms might use external expertise. The Race To Scalability 2020 is the sixth in a series of biennial reports on our ongoing research. We talked to more than 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%).

Key Takeaways

  • All participants report outsourcing at least one business function
  • 59% of advisors say they successfully used an external provider to grow
  • More time with clients is the top reason given for outsourcing

We sought details about how advisors used their internal resources and the outcomes they achieved when using external managers. For example, we asked advisors how they spent their time to get a sense of their core activities. They told us that each week, on average, they spend 9.5 hours in client meetings, 8.0 hours on portfolio monitoring, 6.4 hours working with technology, 6.2 hours on portfolio construction, and 4.3 hours weekly on manager research.

Advisors who managed all investments in-house told us where they used external help. Investment product analysis (66%) and information technology (60%) were the most commonly outsourced functions followed by marketing (39%) and asset allocation models (29%). All survey respondents used an external provider for at least one business function, but most outsourced more than one function.

We wanted to know if advisors who manage investments in-house had changed their overall usage of other third party providers over the last three years and why. Just 5% reported a decrease in outsourced business functions. In comparison, 61% reported no change and 34% increased their level of outsourced business functions. Among those who had increased usage, freeing up time to work with clients was reported as a motivation for 63%. Business development was cited by 55% and cost-cutting by 21%.

Throughout the life of this 10-year survey, the majority of advisory firms (about 60%) keep the investment function in-house. We regularly ask what would need to happen change their decision to use external investment managers. We discovered that the top three potential scale tippers are capabilities that could uncover efficiency in the client experience as well make things easier for the advisor:


  • increased affordability of solutions (34%)
  • availability of a user-friendly technology platform (24%)
  • a broader range of available outsourced investment management solutions (17%)

Effective Scaling can boil down to finding the most efficient way—internally or not—to deliver the flexibility and ease that clients demand.


While still too early to determine how the effects of the Covid-19 pandemic will change outsourcing decisions in the long run, the timing of the 2020 survey allowed for an initial reading of advisor thinking. When firms that do not outsource investment management were asked whether their opinion has changed as a result of the pandemic, 15% of respondents said they now planned to increase usage of outside managers, while 85% said they plan to reassess their strategy and reconsider the potential of outsourced investment management. If anything, the pandemic has prompted a swift and perhaps significant change in thinking.

Where’s the Growth in the Machine?

While the prevalence of investment management outsourcing remains stable (about 40%) across the industry, the use of external investment resources can ebb and flow throughout the life cycle of a firm. We suspect that this may be linked to how advisors choose external managers to fit strategic business objectives. Can using external expertise lead to growth, a common business goal? Over the years we have fine-tuned the conversations with advisors to gather more details around this question.

In 2016, we began asking about whether an advisor’s client base had grown as a result of using an external manager. Some 52% of advisors said that it had. Also in 2016, 19% said the use of third-party managers produced no growth in clients and 30% were unsure. Comparatively, 59% of advisors told us in 2020 that their client base had grown as a direct result of using a third-party manager, while 15% noted no growth in clients and 26% said they are not sure. A majority of advisors (71%) utilizing external investment managers told us in 2020 that their firm experienced gains in revenue as an outcome of outsourcing.

While these metrics are good news for firms that have taken the leap to external investment management, we have also noted that fewer advisors are outsourcing all investment activities. The majority of firm are keeping some investment management in-house and outsourcing strategies where they don’t have deep expertise.

Effective scaling can boil down to finding the most efficient way -- internally or not -- to deliver the flexibility and ease that clients demand. Working this out may involve understanding how reliance on external provider support could impact the overall client experience. For example, will your firm be required to sacrifice some ability to work within a client's risk tolerance for access to more asset classes?

FlexShares remains committed to understanding how advisors choose to grow their business. To learn more about what we recently discovered, check out our white paper, The Race to Scalability 2020. You can find in-depth coverage of our survey results to keep you updated on how peer 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

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