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Should You Outsource Your Investment Management?


By Scott MacKillop | June 22, 2017

Industry Press

If you're thinking about outsourcing, read this first.

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Outsourcing is not for everyone. Depending upon which studies you look at, somewhere between 25% and 50% of all advisors outsource some or all of their investment management functions.

There are significant advantages to outsourcing, but they come with trade-offs. By asking yourself three questions and considering the list of benefits and trade-offs below, you can quickly determine if you are a good candidate for outsourcing.

What’s Your Passion?

The first question to ask yourself is, “Why did I become a financial advisor?” Advisors usually fall into one of two camps. Either they love the technical aspects of the business or they love working with people.

If you’re a “techie” whose passion is investing, you are probably not a good candidate for outsourcing. Why deprive yourself of the activity that brings you joy? However, if your technical passion is financial planning, outsourcing could allow you to concentrate on an area that truly delights you.

If you’re a “people person,” consider outsourcing. You could effectively buy back a significant number of hours each week and spend them interacting with clients and potential clients. This could energize you and enhance the quality of your work day.

Where Do Your Talents Lie?

The second question is, “What am I good at?” Even if you are passionate about investing, if you are not skilled at it, consider outsourcing. Your clients shouldn’t suffer simply because you enjoy investing.

If you are good at investing, but don’t care for it, pause before deciding to outsource. Your clients shouldn’t suffer simply so you can off-load a task that you don’t care to do.

What Are Your Goals?

Your decision should be based on your goals. If you’re happy with your firm and your work life, don’t outsource. However, if you have plans for changes, outsourcing could help you achieve your goals.

Consider the Benefits

If you think outsourcing may be for you, here is a closer look at some of the benefits:

More time to grow your firm. Firms that outsource have more time to prospect for and service clients. This client-centric focus fosters client acquisition and client retention. Advisors who spend their time researching and implementing investment ideas don’t have as much time to find and service clients.

Operational efficiencies. Maintaining a back office to support investment management activity can be expensive and time consuming. It also takes focus away from areas where you can truly add value. Firms that outsource don’t need back office systems and don’t expend their valuable resources on them.

Investment department cost savings. Running an in-house investment department is also expensive and time consuming. It comes with management responsibilities as well. Outsourcing can eliminate these expenses and distractions.

Concentration on areas of strength. Some firms outsource as a way of concentrating on their strengths. Outsourcing could help you focus on services that have a greater value to your clients, such as financial planning and behavioral coaching. Or you can outsource some investment activities and retain those where you have special expertise.

Sitting on the same side of the table with the client. Some advisors have concerns about the potential conflict of interest that exists when their firm creates a financial plan and then also implements the investment portion of that plan. By outsourcing, a firm can maintain a more objective posture in analyzing and critiquing client investment performance.

Institutionalizing a practice. Many firms are dealing with succession planning issues or are trying to institutionalize their practices so they can be sold. It’s difficult to transfer a practice if the founder is the chief investment officer. Outsourcing allows you to “rent” an investment department that remains after the founder’s departure.

Enhance the credibility of your investment department. Some advisory firms do a fine job of investing, but don’t have strong investment credentials on paper. This may hamper new client acquisition and weaken the firm’s competitive position. By outsourcing, a firm can enhance the credibility of its investment offering.

But There Are Trade-Offs

Before you outsource, consider these factors as well as the benefits:

Cost. Outsourcing is not free, and prices vary greatly among outsourcers. Make sure you net any savings you achieve at your firm through outsourcing against the actual costs of outsourcing.

Quality of portfolios. Outsourcers come in all shapes in sizes. Make sure their portfolios are consistent with your investment philosophy. Understand their investment process and their performance. Make certain they offer a full range of portfolios to meet all your client needs.

People. An outsourcing firm is no better than its people. Study their backgrounds, experience and reputations. Talk to as many of them as you can and visit their offices if possible. Make sure their culture, attitudes and work style are consistent with your own.

Control. When you outsource, you lose some level of control. Outsourcers have minimum account sizes and limits on the services they provide. Make sure these limits are consistent with your needs.

Service. The quality of the ongoing service you receive will determine how satisfied you are with your outsourcing decision. Understand the service model and get referrals to other advisors who can share their experiences.

Fit. It is important to make sure you are a good fit to work with any outsourcer you select. Learn about their target market, their average account size and their per-advisor AUM targets. Be sure they will value the relationship and not view you as a tag-along.

Again, outsourcing is not for everyone. But with some soul-searching and a little detective work you can determine if it’s right for you and identify a partner that fits your needs, style and philosophy.