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Practice Management > Building Your Business

Turning Inside Out

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Generally speaking, activities that are core to your brand and offering should be managed in house while those activities that are incidental or supplemental to your vision and strategy make good choices for outsourcing.

The reality is that advisors outsource a lot. Advisors using mutual funds, SMAs or ETFs outsource the investment management function, even if they determine the asset allocation. Investment managers investing directly in stocks and bonds often outsource much of the research that informs those decisions. Advisors utilizing a custodian or broker-dealer outsource many of their middle- and back-office functions and delegate the safe holding of securities to another entity. RIA firms regularly and systematically outsource many of the processes related to compliance, though, in the end, they are accountable for the activities of their firm and for adhering to regulatory requirements.

Firm leaders often realize that they do not add value to commoditized functions. In the examples above, outsource providers take the most basic elements of serving the end investor and package them in a way that drives down costs and makes the activity more streamlined and efficient than a single advisor could ever hope to.

Outsourcing decisions involve more than just purchasing services, however. Advisors must carefully balance the need for control with the need to grow. One should carefully weigh the impact of diverting resources to an ordinary task against investing in what makes your business flourish, and compare fixed costs to variable costs in order to better manage cash flow.

The Need for Control

It is common if not typical for financial professionals to try to control every aspect of what they do. Many believe that by holding tight to processes, they can ensure a consistent client experience and guarantee that everything will be done right.

While there is an element of truth in this belief, consistency and quality both suffer when the advisor is overwhelmed with clients demanding attention and there is no process in place to double-check the work. Does that still feel like control?

If you add staff to help lighten the load, you must ensure that the work meets your standards and the needs of your clients. Delegation, whether to an outsourced solution or to somebody internally, must be accompanied by clear expectations, a consistent process of review and confidence that whoever is doing the work has both the expertise and the necessary attention to detail.

Frequently, I hear advisors say it is easier and faster to do it themselves than to turn it over to somebody else. That is just rationalization. And it is true only once. Any time or attention an advisor gives to something that could be performed by someone else reduces his value to clients. Further, every advisor has a finite capacity; a time will come when they cannot take on any more clients unless they add capacity. When that happens, their need for control will stunt their own growth.

Diversion of Resources

One of the most compelling reasons to outsource is so that advisors can redirect their resources to areas where they make an impact and that best convey their brand and offering. This is one of the big reasons why mutual funds became such a popular investment vehicle in delivering retail financial advice. Mutual funds allow the advisor to leverage professional institutional-quality investment management, achieve diversification even for the not-so-wealthy and execute transactions at a relatively low cost.

Other investment vehicles provide the same type of leverage. In some cases, such as with hedge funds, advisors gain access to unique opportunities that they may deem appropriate for clients who otherwise could not access them. Even the largest institutions such as banks and wirehouse firms use these packaged products as a way to keep their brokers focused on the client or focused on selling, rather than performing the role of money manager. Outsourcing can be implemented to support a strategy, with the goal in this example higher production.

Smaller firms, including most independent rep and RIA practices, heavily rely on outsourced investment solutions. They also outsource many other business activities ranging from financial and estate planning services for clients, payroll accounting and distribution for employees, tax preparation and, in some cases, staffing. In each case, the advisor determines that an outside provider can perform the function faster, cheaper or more efficiently.


Business development is an intriguing area of outsourcing. Advisors may turn to this solution because of a discomfort with the sales process or because other critical parts of their practice (such as client management) consume their time.

This channel includes referral programs in which custodians steer retail clients to advisors. Some advisors depend on these referral programs for all their leads. While convenient, sole reliance on outsourced business development is also risky and expensive; advisors must pay a percentage of the revenue generated back to the source in perpetuity, and also loses the opportunity to establish their own brand in the market.

Branding goes well beyond the sales and marketing initiatives of a firm. Branding reflects your promise to clients in terms of what you will deliver and how you will deliver it. How do clients and centers of influence describe you when making a referral? If you want to be known as the leading financial planning firm for business owners, for example, avoid outsourcing any activities that would take away from that core offering. If you want to be known for your superior performance as a money manager, ensure that you have close control of the process that allows you to invest effectively.

On the other hand, if financial planning is incidental to your business and done only occasionally and tactically, then this might be a function you outsource rather than attempt to do inexpertly.


Increasingly, advisors are adding technical support staff so that they can leverage their time and take on more business. But each addition of staff brings cost increases, forcing advisors to examine the decision of “owning” this support from an economic point of view.

How many new clients generating how much revenue do you need to pay for that additional person? How long will it take to amortize that investment or just break even?

Outsourcing allows an advisory firm to manage its business on a variable cost basis, meaning that the costs fluctuate with the ebbs and flows of their business. When an advisory firm is growing, however, it is hard to gain real operating leverage if costs are rising at the same rate as revenue. So there comes a time, especially with volume increasing, when it makes more sense from a profit management standpoint to invest in permanent resources and transform the variable expenses into a fixed cost. The benefit for a growing firm is that once they overtake the break-even point, each dollar of revenue produced goes right to the bottom line.

Relying on a large variable cost structure is a lot like renting. It allows one to occupy a space without having to come up with a lot of cash. In the long run, this convenience also means you are not building equity or managing your expenses so that you can harvest a better return on your dollars.

Ultimately, economic reality combined with a lack of expertise in all areas usually forces the decision to outsource regardless of one’s strategy. But when advisors step back and examine how outsourcing will impact their brand and deliverables—and when the firm becomes larger and scalable—the decision to bring an activity in house becomes more obvious.


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