Financial advisors are regarded by clients as bastions of financial knowledge but they also, as business owners they have their own financial challenges to address. How can firms keep up with their core value proposition and still positions themselves to scale? A growing number of advisors have been re-tooling their business models to deliver comprehensive financial management services to clients. Working with external investment managers—whether in part or in whole— has become one of the top methods used to achieve this expanded focus.
In our quest to gain an in-depth understanding of how and why outsourcing is impacting the financial advising profession, we conducted six surveys over ten years. Our latest research involved speaking to over 500 professionals from across the industry from firms with AUM ranging from under $50 million (25.9%) to over $3B (12.6%).
- Advisor cite more time with clients as the key reason they outsource investments
- How advisors utilize external managers has changed over time
- Those using external managers are satisfied with their decision
The overall industry percentage of turning to external expertise for investment management services has remained steady for over the decade, hovering around 41%. Firms who engaged external managers tended to remain on that track and long-term users (10 years+) increased from 30% in 2014 to 47% in 2020. From our conversations, we discovered that as firms delegate more client assets to external managers and support tools, they are able to gain tactical advantages.
Uncovering Tangible Value in External Support
The shift in advisor strategy seems to be paying off. A 59% majority report that outsourcing investment management helped in expanding their client base. Half of these firms estimate they have experienced at least 25% average annual growth since they began using external investment managers. And 71% say engaging external expertise helped them increase revenue.
Our 2020 data, similar to 2018, reported the top five strategic benefits of using an external investment manager as:
- having more time with clients (54%)
- a consistent investment management process (51%)
- more time for business development (49%)
- institutional quality due diligence and monitoring (39%)
- better investment performance (39%)
Using external investment managers seemed to have an impact on the client experience as managers reported having more time and freedom to focus not only on current clients but also to cultivate relationships with potential clients. This came in the form of greater business development success for 31% and better client retention for 27%.
Overall, 95% of advisors who outsource report being either “very satisfied” or “satisfied” with their decision to use external investment managers. For 36% of respondents, using this support has reduced costs associated with managing portfolios internally and 24% of those have passed along those savings by reducing client fees. This area of satisfaction is up from prior years.
Choosing whether and how to engage an external manager shouldn’t be about keeping up with industry trends. The journey should be a carefully deliberated undertaking that is integrated with the strategic objectives of your firm.
Choosing whether and how to engage an external manager shouldn’t be about keeping up with industry trends. The journey should be a carefully deliberated undertaking that is integrated with the strategic objectives of your firm. The right external partner will be open to helping you identify the opportunities and challenges the relationship could bring.
Over the long haul, working with external investment managers to expand the investment opportunities available to clients can deepen a firm’s expertise with financial markets. Seek out relationships that will offer insights into high-quality investment ideas and research as well as industry best practices and innovation. External investment support can also offer the opportunity to operate in niche markets, allowing the advisor firm to stand out from the competition. It’s essential, however, that the collaboration be built on shared investment perspectives.
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. 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