Is insourcing the new outsourcing?

By Gavin Haynes, Co-Founder and Investment Consultant, Fairview Investing Ltd

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Nov 28, 2019
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If all advisers want to outsource to discretionary fund managers, then some business models – including our own – may well be flawed. But we are already seeing a number of advisory businesses that appreciate the value of being in control of their clients’ investments.

The reality is of course, advisers cannot fully abdicate responsibility of investment strategy through outsourcing. It is ultimately the adviser who has responsibility for ensuring they are providing their clients with suitable, high quality and consistent advice. In most instances outsourcing to a DFM should be seen as one of many options that can make up a centralised investment proposition, with the DFM viewed as a product provider (not as a strategic partner taking full responsibility of the advisers’ investment strategy as many like to promote themselves).

Outsourcing – When, why and who?

I believe that there is a time and a place for outsourcing (no surprise given my previous life heading up DFM propositions). Advisers do need to consider the outsourcing options when building a robust CIP and segmenting the offerings to different clients.

The increasingly competitive market for DFM model portfolios will see charges continue to fall. This will also exert downward pressure on fees for multi-manager funds. The commoditisation of these offerings is not good for the wealth or fund manager profits, but it provides some attractive low-cost options for advisers. But knowing who to outsource to is a big task in itself and requires significant ongoing due diligence.

Perhaps a trickier question for advisers is to what extent they outsource to a wealth manager who uses a traditional DFM approach, where the DFM manages a ‘bespoke’ portfolio and has a direct relationship with the client. These are typically used for higher net worth individuals - the most valuable clients for an adviser business.

With increasing consolidation and centralisation of investment process in the wealth management industry it is questionable to what extent the DFM is effectively a relationship manager as much as an investment manager. If this is the case I question the value to the adviser and client of this approach. The adviser should be best placed to know their clients and maintain the relationship, whilst if they have a robust CIP their clients can receive a well-managed solution at a lower cost.

A shift in momentum?

Whilst there has been a significant increase in outsourcing I do wonder if the momentum is shifting. We are witnessing many larger adviser businesses build their own in-house investment solutions and an increasing number look to gain DFM permissions.

Platform costs are being driven down and there are increasing technological advances and tools available that make it easier for advisers to build and maintain well managed investment portfolios for their clients, and increase the value of their business.

Providing they put in place clear rules, undertake rigorous ongoing due diligence and take a common-sense approach to investing, adviser businesses can do a very good job overseeing client investments. Their clients should not always have to pay an extra layer of charges and DFMs looking to persuade advisers to outsource will have to demonstrate value like never before.

 By Gavin Haynes, Co-Founder and Investment Consultant, Fairview Investing Ltd

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