FlexShares survey finds financial advisers satisfied with external investment solutions

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Northern Trust Asset Management’s FlexShares Exchange Traded Funds has announced findings from its latest biennial study on financial advisers’ adoption of external investment management services.

This year’s version of the survey, which was first conducted in 2010, revealed that the use of outside investment managers has continued to gain traction in the advisory industry over the past two years. Firms already using external managers increased their allocations, while many firms that had not previously outsourced decided to start during the pandemic.


The survey of over 500 advisers found that firms using external managers have been highly satisfied with their experience, often choosing to increase their level of outsourcing over time. In the past two years, nearly all firms already using external managers either increased their outsourcing activities (50 per cent) or kept them consistent (49 per cent). Ninety-five per cent of firms reported being ‘satisfied’ or ‘very satisfied’ with their outsourced solutions, and a majority (53 per cent) directly correlated their outsourcing activities with allowing them to generate more revenue.


While a smaller proportion of registered investment advisers (RIAs) choose to outsource as compared to independent broker-dealers (IBDs), the RIA subset is beginning to rely on third-party providers at a rapidly increasing rate, the survey found. In 2022, 32 per cent of RIAs now outsource as compared to 27 per cent in 2020. This figure has remained largely unchanged for IBDs at around 50 per cent.


RIAs also reported higher levels of outsourcing as a percentage of assets under management (AUM). On average, RIAs outsource approximately 50 per cent of AUM while IBDs outsource 39 per cent. This increased adoption may be a function of business size. As RIAs tend to be smaller enterprises, many need greater external support amid recent market disruptions.


Within each adviser channel, there are also differences in what the firms are choosing to outsource. RIAs are more likely than IBDs to outsource back-office operations (25 per cent vs. 15 per cent). By contrast, IBDs put more of their outsourcing efforts into investment manager research (38 per cent vs. 22 per cent) and due diligence/monitoring (27 per cent vs. 17 per cent).


The 2020 iteration of this survey asked firms who handle investment management in-house whether their opinion of outsourcing had changed as a result of the pandemic - 15 per cent of respondents said they plan to increase their usage of outside managers and 85 per cent would reconsider doing so. Two years later, a significant number of firms have been shown to have ultimately chosen to start outsourcing investment management.


In this year’s survey, about one-third (34 per cent) of advisers said their firm outsourced investment management for the first time during the pandemic. These firms likely turned to external managers to cope with the high turnover and instability of this period, even if they hadn’t outsourced before. Furthermore, firms that were already outsourcing before Covid-19 knew they could rely on external services – almost a quarter (23 per cent) reported that they increased outsourcing during the pandemic.


“While the trend towards investment outsourcing had already been gaining momentum as advisors shifted towards more holistic financial planning activities, outsourcing is also proving to be a source of stability in more turbulent market conditions,” says Laura Hanichak Gregg, Director of Practice Management and Advisor Research at FlexShares. “As the investment landscape has become increasingly volatile over the past few years, many firms have utilised external resources for the first time or expanded their existing activities, perhaps as a way to cope with recent disruptions.”


While the overall share of advisers choosing to outsource has remained highly consistent over time, attitudes towards outside managers continue to shift favourably and may suggest further adoption in the future. Firms that don’t outsource today are becoming more open to it – the number of firms ruling out investment management outsourcing has consistently declined over the past five years.


When advisers were asked what would change their opinion, affordability remained the top factor. However, the focus on cost appeared to be receding in favour of the quality of options available. This year, the importance of a “broader range of solutions” was favoured by almost a quarter of respondents, as compared to 17 per cent in 2020, the firm says.


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