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Clients OK With Outsourced Investment Management: Northern Trust

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Advisors who have held back on outsourcing investment management out of fear of their clients’ reactions may have been overly cautious, according to a study released Thursday by Northern Trust.

The report found 92% of clients had a positive reaction when their advisor told them they were outsourcing the investment management portion of their services, and 80% said they lost no clients when they transitioned to outsourcing.

Nothern Trust provides investment management among other financial services.

Large firms, those managing more than $150 million in assets, were a little more likely to see a negative response from clients initially. However, smaller firms were more likely to report losing clients or revenue as a result: 27% versus 16% of large firms.

The survey asked respondents to choose from four possible rationales they provided when explaining their decisions to clients. By far the most common positions taken were regarding resource allocation and alignment. Forty-three percent of respondents said they presented their decision as one that would allow them to leverage their time and expertise; 35% told clients the decision allowed them to hire the best money managers and replace them as needed.

Just 9% positioned the move to clients as one that allowed them to enhance or focus more on service. Five percent said the move was a way to reduce costs.

For the advisors themselves, 70% said their business grew after they started outsourcing investment management duties.

“Advisors greatly value their client relationships, and as the marketplace becomes more sophisticated, sometimes reaching out for that expertise can enhance your position with your clients,” Eric Schweitzer, managing director of the financial intermediary practice at Northern Trust, told ThinkAdvisor on Friday.

However, among advisors who don’t outsource, 56% say that’s because in-house management is part of their value proposition. Even though 31% said they would consider outsourcing if it were more affordable, 33% said it wouldn’t change their position.

The “Investment Management Outsourcing: Impact on Clients” report is the third in a biennial series that began in 2010. Northern Trust surveyed nearly 200 advisors for the report in November and December 2013.

Throughout the series, advisor satisfaction with outsourcing has remained stable, with about 90% of advisors saying they’re satisfied.

Most respondents said they were using multiple providers for their outsourcing needs, although 53% are using turnkey asset management programs. Most advisors are particular about which services they outsource, though. Almost 60% said they outsource specific asset classes and strategies. Only 29% said they outsource all of their investment management activities, whereas in 2012, about half of advisors were doing so.

“We’re seeing more advisors use multiple firms to get the job done,” according to Laura Gregg, vice president of senior relationship managment for Northern Trust.

Advisors are selective about which clients they outsource for and how much of their assets they let someone else manage, too. Forty percent of respondents said they outsource investment management for all client accounts. Almost half of advisors said they were outsourcing more than half of their clients’ assets.

Those most likely to be outsourced were large accounts, those with alternative or complex strategies and new accounts. Indeed, the primary reason advisors gave for choosing to outsource an account was access to alternatives expertise. Portfolio construction and monitoring were also cited as main drivers of the decision.

Schweitzer noted that it’s possible more advisors see outsourcing as a way to add expertise they don’t have themselves for their clients.

“If a practice viewed outsourcing from an operation perspective in the past and now they see an asset class that their clients are asking about, that would be an easy add-on, and that might have increased our numbers,” he said.

In 2012, the top three reasons for outsourcing were access to asset allocation models, access to certain managers and potential for alpha.