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Easing the burden

Gregor Watt reports on why providers see opportunities for the outsourcing of investment management

The RDR is bringing about many changes to the way that IFAs run their businesses and one trend that is attracting interest among product providers and wrap providers is the potential increase in the number of IFAs that will outsource their investment management.

A recent survey from discretionary investment manager Rathbone Investment Management reports that 47 per cent of IFAs are already outsourcing the investment management of their clients’ assets, with another 42 per cent actively considering it.

Investment director Robert Hughes-Penney says cost and time pressures are the two driving forces behind what the firm sees as a growing trend.

“Many IFAs are realising that outsourcing investment management to discretionary fund managers provides enormous benefits for their business and can free up their time to concentrate on client service and giving expert advice, such as tax planning or pension advice.

“In the run-up to RDR, IFAs will be looking at ways to limit their exposure to risk and reduce costs – outsourcing services to a third party is one option that many will be considering.”

Hughes-Penney says, in the past, the cost of outsourcing investment management has deterred some IFAs but the retail distribution review will force many firms to consider outsourcing investment management as they review what their existing arrangement costs them.

Rathbones reports that 62 per cent of firms say their current fee structures just about cover the cost of their investment management proposition, with 10 per cent of businesses reporting that their current fee and commission structure does not generate enough revenue to cover their current investment management arrangements.

Hughes-Penney says: “Many IFAs will be looking very closely at their fees, especially in light of the RDR, which will dramatically change the fees and charges environment.

“In future, IFAs will need to think carefully about how they generate the revenue to cover their investment process which, for many, may result in a shortfall.”

Wrap provider Avalon Investment Services has also reported an increase in interest in outsourcing of the investment management function by IFAs.

Managing director Harry Kerr says the biggest drivers for outsourcing are a lack of expertise and the ability to reduce regulatory risk.

Kerr says: “The main drivers of the move for most firms we are talking to are a reappraisal of their business model, looking at where their skills and experience lie and where they see they add value in the adviser-client relationship. For many, they view a lack of expertise in investment selection and time as the key reasons to consider outsourcing.

“For independent financial advisers who must demonstrate, under RDR rules, sufficient knowledge of the broad range of investment vehicles in order to remain independent, outsourcing also reduces regulatory risk.”

Aifa recently responded to the increase in interest in outsourcing investment management among its members. Last week, Aifa, in partnership with 7IM, published a factsheet on outsourcing to help advisers weigh up the pros and cons.

’Outsourcing investments allows the finan cial planner to sit on the same side of the table as their client, ensuring that the investment manager is doing the job’

Aifa reports that lack of expertise and time to devote to investment research are the main reasons for IFAs to outsource investment management.

7IM chief executive Tom Sheridan says IFAs can turn a problem into an advantage as outsourcing some or all of the investment function can eliminate a job advisers often do not get paid for and make the value of their service clearer to clients.

Sheridan says: “Many financial planners and wealth managers who do make portfolio decisions do not actually get paid more for their trouble, even though the time and resources required are quite considerable and the investment and regulatory risks are high.

“Outsourcing investments allows the financial planner to sit on the same side of the table as their client, ensuring that the investment manager is doing the job.”

Another business to see the potential in helping IFAs with a portion of their business is Barclays Wealth.

In September, the company set up five risk-profiled multi-asset portfolios in its first UK Oeic to meet what it sees as an increase in demand from IFAs.

Director Tony Lanser says: “We believe there is a huge opportunity for us to grow our business within the intermediary sector and the launch of the global markets portfolios is the first step towards this expansion.

“We have seen demand from our existing intermediary relationships for this type of product and we anticipate this to grow as intermediaries are faced with increasing challenges, in particular the impact of the RDR.”

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