FlexShares survey finds majority of US financial advisers planning to reassess their approach to outsourcing investment

Survey

Northern Trust Asset Management’s FlexShares Exchange Traded Funds (ETFs) has published the sixth biennial outing of its study on US financial advisers’ views and adoption of external investment management services. 

The study was first conducted in 2010, and this year’s survey reveals that while the overall percentage of advisers who outsource investment management is consistent over the past decade, the way that advisers leverage external services is changing.  

The survey of more than 500 advisers found that the share of advisers using external managers today (41 per cent) is virtually unchanged from 2010 (42 per cent), however the pandemic has encouraged firms that do not currently outsource to reassess their approach. 

When firms that handle investment management in-house were asked whether their opinion of outsourcing has changed as a result of the pandemic, 15 per cent of respondents said they planned to increase usage of outside managers and 85 per cent said they plan to reconsider the use of external management. While the pandemic has not triggered a significant shift towards third-party investment outsourcing to date, it’s a growing consideration among advisory firms, the survey found.

Advisers that currently work with an external investment manager are outsourcing a greater number of client accounts, but becoming more targeted in their use. Advisers are more likely to outsource some or all investment strategies for all their accounts, rather than just their largest clients. This all-account approach is the choice of 49 per cent of those who outsource, up from 39 per cent in 2018 and 33 per cent in 2016. However, the overall percentage of client assets outsourced was unchanged from 2018 at 53 per cent. This may reflect a smaller scope of activities employed across a greater number of clients. 

There is also a meaningful uptick in the types of accounts being outsourced, FlexShares says. In 2020, advisers outsourced 38 per cent of complex portfolios vs. 15 per cent in 2014; 22 per cent of less complex portfolios from 2 per cent in 2014; and 35 per cent of portfolios based on tax considerations, up from 11 per cent in 2014. This demonstrates a growing view that third-party investment management is suitable for portfolios of all sizes and complexities, the survey finds.

Despite using external managers for a greater number of accounts, advisers are becoming more selective in the activities they choose to outsource, according to the survey. The percentage who outsources all activities has consistently declined to 12 per cent of respondents from 50 per cent in 2012. Approximately two-thirds (66 per cent) outsource portfolio management, with product selection and asset allocation also key areas of focus. Some 15 per cent of advisers use external managers for product selection, up from 8 per cent in 2018. When asked for the first time about usage of outside asset allocators, 32 per cent of respondents said they outsource the function.

Though most advisers continue to manage investments in-house, there are several other ways non-investment outsourcers are gaining efficiencies. The survey found 100 per cent of advisers that kept investments in-house outsourced at least one non-investment function, and on average they outsourced 2.6 other activities. 

They are increasingly relying on external help for services such as investment product analysis, up to 66 per cent in 2020 from 57 per cent in 2018, reflecting advisers’ desire for support in investment selection. There is also significant growth in outsourcing their marketing function, up to 39 per cent in 2020 from 20 per cent in 2018. Finally, new to the survey this year, 60 per cent of advisers indicated they rely on external help for information technology services. 

“Over the past 10 years, we’ve seen a clear shift in the perceived benefits of third-party outsourcing – whether that’s utilising external investment managers or other non-investment related service providers – as advisers’ expected role continues to evolve from investment manager to holistic financial planner,” says Laura Hanichak Gregg, Director of Practice Management and Adviser Research at FlexShares. “As the investment landscape has become increasingly complex and clients demand more from their advisers, external resources of all types are helping advisers better focus their time on activities for which they add the greatest value.”   

To execute on outsourced investment strategies, 61 per cent of outsourcing respondents say they turn to providers of turnkey asset management programs (TAMPs), down from the 67 per cent in 2018, but up from 52 per cent in 2016. Advisers are also increasingly employing ETF strategists, now used by 34 per cent of respondents, up from 23 per cent in 2018 and 29 per cent in 2016. This likely reflects advisers’ demand for services that can provide direction amid the substantial rise in passive investment vehicles over the past decade.  

As it assumes a greater role in advisory practices and clients’ lives, technology is shaping adviser decisions about external management. An increasing number of advisers are employing automated digital advice platforms, used by 16 per cent in 2020 compared to 6 per cent in 2018, according to the survey. Issues surrounding ease of use and integration with existing platforms are growing in importance. Of respondents who do not outsource, 17 per cent say that the availability of a user-friendly technology platform would be an incentive for them to reconsider their decision, reflecting the fact that whether they outsource or not, advisers are increasingly becoming comfortable with incorporating digital solutions into their practices.

The survey went to 90,000 advisers and closely related professionals in the US between 2 March and 4 June, 2020.

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Beverly Chandler
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