Financial advice market: Outsourcing investment services

Do you expect to increase or significantly increase your use of outsourced investment services over the next 12 months?

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Mickey Morrissey
Published: 27 Nov 2017 Updated: 09 Nov 2022

80% of respondents, in our survey, said they expect to increase or significantly increase their use of outsourced investment services over the next 12 months. 53% say it’s fairly straightforward to make comparisons when deciding which investment provider to outsource to, whereas, 27% say it’s extremely difficult. Defaqto’s research suggests that the percentage of advisers outsourcing some or all of their investments in 2014 was 41%. In 2017, it has increased to 46%1.

Financial Advice Market

Andy Bracken: Outsourcing is not straightforward. There are constant changes taking place which are very difficult to keep on top of. MiFID II is going to bring a great focus on cost. There’s a massive change around making sure that what we are delivering for clients is risk appropriate and understanding what clients are getting, how it’s going to work and whether it’s good value for money for the client. If it isn’t good value for money, you’re going to be dead.

Paula Steele: I thought it was extremely difficult back in about 2007. In 2009 we set up an outsourced business which we then insourced. So we set up a completely separate investment business, which we now insource to us and 25 other platforms. It never speaks to the client. It now has discretionary permissions as well as advisory. I went round the whole market and thought I was going to outsource, but then found value for money was better through insourcing.

Deane Anderson: I find it relatively straightforward because I have limited what I do to model portfolios on platforms. The problem is which model to use. There are 80 of them. How do we distinguish between them? Also, we need to keep checking that the model is still good and not just rely on past performance. I have narrowed our solution down to keep it manageable, but keeping it current is key.

Jarrod Ellis: We outsource mortgages, private medical insurance and a number of other functions. We’re very clear about what we insource and what we outsource. If you look on the investment side, there are benefits to totally independently outsourcing. It’s quite easy to sack the investment manager, but there’s a cost to that. I think there’s probably a greater cost to outsourcing than there is to insourcing. If you insourced your own investment solution, there could well be a cost benefit but there isn’t from an outsourcing point of view. People used to do everything themselves on a fairly average basis. Now it’s all about doing what you do well or not doing it. Outsourcing can save time. But from a cost basis, it may cost more.

Andy Bracken: We had a visit from the regulator recently. We looked at a client portfolio and they said, “Explain to me why these funds, and solutions and strategies have been selected”. I could tell them that. But I suspect most people in other firms couldn’t – it’s only because I am the Head of TJP Investment, I make sure that all of my colleagues can explain why funds and portfolios are selected, so we have that insight.

Jarrod Ellis: Trying to predict what clients are going to do is an art, not a science. What the regulator then sometimes tries to do is have a scientific overlay on what we do, and the two don’t match. Sometimes you just know what will be good for a client based on experience. The test should be the outcome, not the process. Are you delivering what the client wants?

Mickey Morrissey: In the last seven or eight years, a lot of firms have benefited from outsourcing, including intermediaries who run their own models. There has been significant growth.

Paul Boston: Why do advisers outsource? They do it to reduce risk, they’re not experts and they want expert advice; but a big driver is to cut costs.

In the platform due diligence paper for advisers, it basically said start with the client proposition, and then choose the platform that best delivers that client proposition. When people are outsourcing, they need to choose the platform that gives the money manager first choice access to their first choice investments. What you often see is that the platform ends up constraining investment choice and the client ends up with their second best investment choice. Clients wouldn’t want to pay for second best thinking if they could get the best investment thinking.

Annabel Brodie-Smith: It’s much more difficult with model portfolios. The client has to come first. The client should come before the platform and not vice-versa.

Paul Boston: The platform should enable, not constrain.

Gillian Hepburn: The range of choice available can make outsourcing a challenge. How do you decide between different platforms or investment propositions?

Defaqto DFM Service Review 2017

Research data is from an online survey of 34 respondents, which was conducted in partnership with Discus in August 2017.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.