As advisors face growing downward pressure on their bottom
line, many are seeking new strategies and solutions to help them stay
competitive, whether it’s turning to digital client tools or offering hybrid
pricing solutions.
Despite their search for efficiencies, our latest research
shows the majority of advisory firms and practices still choose to rely on
their in-house competencies for investment management services. What’s driving
this perception of an in-house investment advantage?
Our latest study, The Race To Scalability 2020, surveyed
over 500 advisors, including RIAs (33%), independent broker-dealers (35%),
hybrid/dually registered RIAs (13%), regional broker/dealers (8%), and
insurance broker/dealers (6%), to learn more about advisor attitudes in this
space.
As part of our 10-year commitment to this research, we
analyzed how advisors decide whether and how to engage external support to grow
their firms.
Changing Perception
Over the past decade that FlexShares has done this study,
the percentage of advisors opting not to engage external managers (60%) has
remained remarkably consistent. They’ve often maintained that investment
management is core to their firm’s value proposition or key to client
relationship building.
However, it appears these traditional industry perceptions
are changing.
Our latest research confirmed a continued decline in the
share of advisors who view investment management as their primary business
proposition. As the industry shifts from a focus on investing to more holistic
financial planning, advisors are seeing greater value in a broader range of
activities.
In fact, only 33% of respondents told us that investment
management research was their primary business proposition. Slightly higher
than 32% in 2018, but the percentage has been on an overall decline — from 54%
in 2012, 56% in 2014, 44.6% in 2016.
This opinion change of an advisor’s core purpose has opened
the door for greater consideration of external investment management. Back in
2010, 52% of non-outsourcing respondents said their opinion of outside
investment management “won’t change,” but this figure has dropped dramatically
to 30% in 2020.
The COVID-19 pandemic also has encouraged advisors who do
not outsource reassess their approach. We asked firms that handle investment
management in-house whether their opinion of outsourcing has changed as a
result of the pandemic.
Fifteen percent of respondents said they plan to increase
usage of outside managers and 85% said they plan to reconsider such usage.
While we have not yet seen this shift on a large scale, we expect this trend
will play out in future adoption.
Key Considerations for Increased Adoption
Study participants also identified several specific changes
that would lead them to work with a third-party investment manager.
- Affordability was the most critical factor in
this decision. Nearly half of the 2020 respondents who didn’t outsource
indicated that more affordable solutions for investment management options
would make them reconsider their standing decision.
- A user-friendly technology platform and a
broader range of outsourced solutions essentially tied for second, at around
24%.
Advisors’ growing comfortability with outsourced services
could prove an added boost for external investment management. In fact, 100% of
advisors who keep their investment management function in-house outsourced at
least one non-investment area – most outsource more.
Some of the more popular areas for outsourcing include:
investment product analysis, up to 66% in 2020 from 57% in 2018; marketing, up
to 39% in 2020 from 20% in 2018; and information technology services at 60%, a
first for 2020.
The decision to leverage external investment support may not
be the right fit for every advisor; it depends on the firm’s existing
resources, size and client base.
But as the advisory business shifts towards a more holistic
financial planning experience, third-party services can help advisors devote
additional time to meeting client goals and growing their practice.
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