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Advisors Get More Time for Clients When Outsourcing Investment Management

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Financial advisors who use third-party managers have a highly positive view of outsourcing, Northern Trust Asset Management research shows.

Northern Trust’s survey of 550 financial advisors in the second quarter is the firm’s latest biennial report of advisors’ views on external investment management. Since the inception of this research in 2010, the percentage of advisors outsourcing has held steady at about 40%, Northern Trust said.

Ninety-six percent of survey respondents who had an external management program said they were very satisfied with the arrangement, as did all those with more than $3 billion in assets under management.

Forty percent of these advisors said the ability to spend more time on their business was the most positive outcome of using external investment managers. Twenty-three percent cited favorable investment performance, and 15% noted an improvement in client satisfaction.

Asked what benefits their outsourcing program provided, 52% said they could spend more time with clients, and 48% cited consistency of investment management processes.

External management was not an all-or-nothing decision for these advisors. Just 17% said they outsourced all investment management activities in 2016, but 56% outsourced their portfolio management.

More than half said a combination of active and passive investments fulfilled portfolio construction strategies, and they did not anticipate changing that strategy in the next several years.

Forty-one percent of advisors reported they were outsourcing 75% of client assets, compared with 36% who said this in the 2014 study.

Fifty-two percent said they were likelier to use turnkey asset managers, and 41% RIAs, than other types of providers. Two new options in this year’s study also attracted interest: ETF strategists, 29%; and robo-advisors, 7%.

“Using a third-party manager can be a win-win scenario for advisors and clients, as is demonstrated by the percentage of client assets being outsourced,” Marie Dzanis, head of intermediary distribution at Northern Trust, said in a statement. 

“Increased usage of investment management by turnkey asset managers, RIAs, ETF strategists and the increasing use of robo advisory or ‘fintech’ capabilities highlight the need for scalability.”

A majority of respondents in the survey did not currently outsource. Forty-five percent of these explained that investment management was core to the firm’s value proposition.

These advisors reported spending some 28 hours a week firm-wide on investment management activities, a combination of manager research, portfolio construction, portfolio monitoring and working with technology.

A quarter said they might consider external management in the future if more affordable options should become available. However, 43% did not expect ever to use external investment management.

Still, non-outsourcers expressed interest in external help in such areas as marketing, compliance, social media training and back-office support.

DOL Fiduciary Rule

The Department of Labor’s new fiduciary rule, which will go into effect next April, will have a big effect on financial advisors, as a new report by A.T. Kearney finds.

Forty-four percent of those in the Northern Trust survey who currently use external management said they did not foresee changing their decision in response to the rule, while 17% expected to outsource more and 5% to reducing this activity.

Five percent of advisors who manage client portfolios internally said the fiduciary rule would cause them to consider outsourcing in the future, and 44% said they would consider the matter further.

Respondents who currently work with an outside asset manager saw a potential change from the fiduciary rule in their sales of commission-based products. Seven percent said they would no longer sell such products, while 39% expected their commission-based sales to decline but not stop completely.

Advisors’ perception of the new rule’s effect varied by firm type. RIAs that used an external provider anticipated little change, with about equal percentages expecting to increase and decrease outsourcing activities.

Twenty-six percent of hybrid RIAs and 19% of independent broker-dealers, on the other hand, anticipated outsourcing more than they do at present.

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