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Why More Advisors Are Open to Outsourcing Investment Management

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As advisors face growing downward pressure on their bottom line, many are seeking new strategies and solutions to help them stay competitive, whether it’s turning to digital client tools or offering hybrid pricing solutions.

Despite their search for efficiencies, our latest research shows the majority of advisory firms and practices still choose to rely on their in-house competencies for investment management services. What’s driving this perception of an in-house investment advantage?

Our latest study, The Race To Scalability 2020, surveyed over 500 advisors, including RIAs (33%), independent broker-dealers (35%), hybrid/dually registered RIAs (13%), regional broker/dealers (8%), and insurance broker/dealers (6%), to learn more about advisor attitudes in this space.

As part of our 10-year commitment to this research, we analyzed how advisors decide whether and how to engage external support to grow their firms.

Changing Perception

Over the past decade that FlexShares has done this study, the percentage of advisors opting not to engage external managers (60%) has remained remarkably consistent. They’ve often maintained that investment management is core to their firm’s value proposition or key to client relationship building.

However, it appears these traditional industry perceptions are changing.

Our latest research confirmed a continued decline in the share of advisors who view investment management as their primary business proposition. As the industry shifts from a focus on investing to more holistic financial planning, advisors are seeing greater value in a broader range of activities.

In fact, only 33% of respondents told us that investment management research was their primary business proposition. Slightly higher than 32% in 2018, but the percentage has been on an overall decline — from 54% in 2012, 56% in 2014, 44.6% in 2016.

This opinion change of an advisor’s core purpose has opened the door for greater consideration of external investment management. Back in 2010, 52% of non-outsourcing respondents said their opinion of outside investment management “won’t change,” but this figure has dropped dramatically to 30% in 2020.

The COVID-19 pandemic also has encouraged advisors who do not outsource reassess their approach. We asked firms that handle investment management in-house whether their opinion of outsourcing has changed as a result of the pandemic.

Fifteen percent of respondents said they plan to increase usage of outside managers and 85% said they plan to reconsider such usage. While we have not yet seen this shift on a large scale, we expect this trend will play out in future adoption.

Key Considerations for Increased Adoption

Study participants also identified several specific changes that would lead them to work with a third-party investment manager.

  • Affordability was the most critical factor in this decision. Nearly half of the 2020 respondents who didn’t outsource indicated that more affordable solutions for investment management options would make them reconsider their standing decision.
  • A user-friendly technology platform and a broader range of outsourced solutions essentially tied for second, at around 24%.

Advisors’ growing comfortability with outsourced services could prove an added boost for external investment management. In fact, 100% of advisors who keep their investment management function in-house outsourced at least one non-investment area – most outsource more.

Some of the more popular areas for outsourcing include: investment product analysis, up to 66% in 2020 from 57% in 2018; marketing, up to 39% in 2020 from 20% in 2018; and information technology services at 60%, a first for 2020.

The decision to leverage external investment support may not be the right fit for every advisor; it depends on the firm’s existing resources, size and client base.

But as the advisory business shifts towards a more holistic financial planning experience, third-party services can help advisors devote additional time to meeting client goals and growing their practice.


Laura Hanichak Gregg, is Director of Practice Management and Advisor Research at FlexShares and Host of The Flexible Advisor Podcast.