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The Benefits of Outsourcing: Part 1

Scott's Column | , ,

Outsourcing of the investment management function by financial advisors has grown dramatically since its beginnings in the late 1980s. Depending on which studies you reference, somewhere between 25% to 50% of all advisors outsource some or all their investment management functions. That number is definitely growing, and for good reason in our opinion.

We believe that outsourcing your investment management can help you grow a larger, more efficient, and more profitable practice than if you managed your client’s portfolios yourself. We also believe that outsourcing can help you focus on the parts of your job that you really enjoy without affecting your bottom line.

Here on the Summit Blog, we’re going to take a closer look at the Benefits of Outsourcing from two perspectives. Part 1 will look at how outsourcing can reduce costs and help you build credibility in your investment department. Part 2 will look at how outsourcing can help you buy back a part of your day so you can focus on the parts of your job that truly energize you.

Reduced Overhead

Building a back office to support investment management activity can be expensive and time consuming. Advisory firms that build in-house investment functions typically need the following systems: portfolio accounting, performance reporting, trading, rebalancing and billing.

These systems are costly and require trained staff to operate them. These systems also represent a drain on management resources and take focus away from other areas where financial advisors can truly add value. Firms that outsource investment management activities need none of these systems and do not expend the valuable resources necessary to acquire and maintain them.

Each firm’s cost structure is different, so determining the benefits that would be experienced by a specific firm through outsourcing would require an examination of its unique cost structure. However, we estimate the costs associated with the operation and staffing of these systems can amount to between 25% to 33% of a firm’s overhead.

Running an in-house investment department is also expensive and time consuming. The primary costs are for research, analytical tools and trained staff to use them. Depending on the resources dedicated to this task, we estimate the costs associated with an investment department can represent, again, between 25% to 33% of a firm’s overhead. Outsourcing can eliminate most, if not all, of these expenses.

Ability to Enhance the Credibility of the Investment Department

Some advisory firms do a fine job investing for their clients, 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 without the costs associated with building a department. The credibility and experience of the outsourcing partner become resources standing behind the advisory firm. At First Ascent, a majority of the Investment Committee consists of independent members which further enhances its credibility.

If you’ve always thought outsourcing was too expensive, look again. Technology has come a long way in the past 10 years, and here at First Ascent, we are able to leverage technology to make institutional quality investment management accessible with our industry first flat-fee of $500 an account.

We think you can build a robust investment management offering and actually improve your bottom line. Next month, we’ll look at part 2 of the Benefits of Outsourcing as we look at how outsourcing can be better for you and your clients.