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The In-House Advantage—Why Most Advisors Hold Onto Investment Management

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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. Firms are trying out a variety of new strategies, including:

However, advisors are fundamentally in the business of relationship building, in which success still hinges upon the ability to understand their client—investment objectives, lifestyle goals, and risk tolerance, particularly for volatility.

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 even 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 the foreseeable future.

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%), 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

  • Most advisory firms rely on in-house investment competencies
  • Advisors keep investments in-house when it is core to their value proposition
  • All advisors surveyed outsourced at least one non-investment activity

Sticking to the Core Business Proposition

Our data shows that the majority, 60%, of advisors decided not to engage outside expertise. The percentage has not varied much across six surveys over the decade. However, the percentage of non-outsourcing respondents saying their opinion won’t change has dropped dramatically—to 30%, down from 52% in 2010. We also learned that firms which keep investment management in-house are relying on external resources for non-investment related items.

...our latest research indicates that the majority of advisory firms and practices still decided to rely on their in-house competencies—at least for the foreseeable future.

The reasons why advisors decide to work—or not work—with external investment managers can vary and hinge upon internal strategic preferences for delivering and strengthening their core value proposition. 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. Retaining flexibility came in at a distant second with only 17.8% of survey participants reporting this concern. However, that number has gone up over time steadily from 7% in 2010.

Given the apparent perception of investment management as a signature activity of the advisory business, we delved into how firms allocate their time across investment management activities. On average respondents told us they spend 4.3 hours weekly on manager research, 6.2 hours on portfolio construction, 8.0 hours on portfolio monitoring, 6.4 hours working with technology, and 9.5 hours in client meetings. Also, only 14.0% of firms reported potential cost as a deterrent to outsourcing, up from 11% in 2016 and 2018 surveys.

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. However, 100% of advisors who keep their investment management function in-house outsourced at least one non-investment area—most outsource more.

Factors to consider

If ultimately you do choose to outsource, the right external consultant should be willing to help you pinpoint the opportunities and challenges that come with your decision. 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.

No matter the firm size, when planning to offer new investment strategies or products, it’s essential to determine whether your team could quickly build the required infrastructure with less impact on the bottom line. Even if that answer is yes, it might be helpful to assess whether liberating resources from other less efficient areas can help you better achieve the new objective. Can any challenges outside of your core value areas benefit from the fresh perspective of a well-qualified external expert? And finally, consider whether your client base might be willing and able to bear some of the costs in exchange for tapping into the bigger end goal: improved portfolio management outcomes.

We realize that looking outside isn’t always the answer. Therefore, we remain committed to sharing what we learned in hopes of supporting advisors in their efforts to grow. To learn more about how advisors are scaling their business, check out our white paper, The Race to Scalability 2020, You can find in-depth coverage of our survey results to help you understand 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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