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Should you outsource your investment management?

The RDR is likely to see more IFAs opting to outsource their investment processes. Rachael Adams considers the pros and cons

The question of whether to outsource specialised areas such as investment has polarised the IFA world for years but as the retail distribution review comes into force, it looks set to become an acceptable way for advisers to keep investment as part of their client proposition.

According to figures from Defaqto, just 19 per cent of IFAs currently outsource the investment process.

JM Finn intermediary sales director Mike Mount says: “Discretionary fund managers have traditionally been seen as a threat by IFAs and as muscling in on their clients.”

This could be about to change. Rathbone Investment Management has found 89 per cent of IFAs are considering outsourcing to DFMs as the RDR approaches.

Axa Wealth also agrees the RDR is going to push more IFAs down the outsourcing route. Last November, Axa added discretionary manager Vestra Wealth to the Elevate platform to broaden IFA access to discretionary management.

Axa Wealth Distributors managing director David Thompson says: “IFAs are increasingly looking at their business models and many will look to outsource their investment solutions to third-party discretionary fund managers. This is a trend that is set to continue with the implementation of the RDR.”

IFA Plan Money recently decided to outsource its investment management to 7IM. Managing director Peter Chadborn says: “Advisers reconsider their client proposition. Their view on outsourcing in light of the RDR is polarised. Some are saying, ’We are going to do it’, whereas others are saying, ’We need to set ourselves apart once the RDR comes and investment is our added value’.”

However, Chadborn believes outsourcing investment will benefit IFAs who remain in the market after 2012. He says: “It broadens your proposition. We are going to look at incorporating various restricted advice offerings to complement our face-to-face advice and that will very much involve outsourcing.”

Many see outsourcing as pivotal to making the most of the independent and restricted labels borne out in the RDR. JM Finn intermediary sales director Martin Berkeley believes outsourcing will allow IFAs to improve their offerings.

He says: “IFAs will be able to give their clients whole-of-market by outsourcing. It is a service, not a product.”

Mount says: “For some IFAs, it is a question of not wanting to put their advisers through more rigorous testing or about cost-effectiveness. For others, it is more about a general desire for their advisers to focus on holistic client management and get away from spending time building portfolios. Financial planning is very much a full-time role.”

Brooks Macdonald intermediary sales director Andrew Denham-Davies agrees the role of the DFM is not a client-facing one, so it does not pose a threat to IFAs.
He says: “The intermediary is the hub of the wheel and we are one of the spokes they use to meet their client needs. They use us either because we manage money in a more focused way than they are able to or because their time can be better spent with clients.”

Interacting with clients is the biggest driver for those IFAs already outsourcing their investment business, according to Close Asset Management. Chadborn is one such adviser who decided to outsource as part of organic business growth.

He says: “In the early days, we thought we needed to offer something the banks were not doing, which was building bespoke portfolios.

“As we grew, we realised we had less time to spend with clients, the vast majority of who we found were less bothered about being shown portfolio analyses and more concerned with face-to-face interaction.”

This prompted Plan Money to outsource to 7IM, employing a discretionary approach for clients with pots of more than £250,000 and a multi-manager approach for those with smaller funds.

Chadborn says most of Plan Money’s outsourced funds are below the level of what DFMs usually manage, typically portfolios of £100,000 and more. The scale of opportunity for business expansion within the IFA market means many fund managers are now servicing smaller portfolios via intermediaries.

Denham-Davies says: “Our managed portfolio service starts at £20,000 but if someone has an Isa, we will start at £10,000. It is about supporting IFAs and their clients.”

Similarly, JM Finn found 60 per cent of IFAs prefer their scalable platform for smaller portfolios.

Mount says: “Larger funds are the bread and butter for DFMs but what is becoming clear is that much of the wealth in the UK is in smaller funds. IFAs are responsible for 70 per cent of the wealth in this country and most of these portfolios are between £30,000 and £100,000. The tie-in with the platform is crucial as it is a cost-effective way for us to help IFAs advise clients of all sizes.”

Denham-Davies agrees cost-effectiveness is a driver for IFAs. A Legal & General survey carried out last year found advisers spend five hours a week on asset allocation but after the RDR, many will not have time to do this.

However, while Denham-Davies agrees outsourcing investment via technology is economic for IFAs, he does not see wraps and platforms as the only solution.

“Wraps give advisers the power to be in control but unless you have a lot of administrative support, you can get into a muddle. That is why at Brooks Macdonald we feed our valuations line by line through to advisers’ existing customer relation- ship management systems, so the need for a wrap is almost not there.”

Whether it is a wrap or a CRM system, technology is the tool of choice for investment managers trying to sell outsourcing to intermediaries.

Chadborn believes technology will have an equally substantial impact on IFAs’ business models. He says: “We are very keen to look at all manner of outsourcing. What the proliferation of technology in outsourcing investment has demonstrated is that a traditional, face- to-face proposition can be complemented by a more reactive online service.”

Pressures arising from the RDR combined with a changing marketplace means IFAs will need to consider new ways of advising, and outsourcing is just one of those options.

“Those who do not consider different models and remain precious about how they share their wealth of knowledge will get left behind,” warns Chadborn. “It is as simple as that.”


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