Advisors and External Investment Managers: Five Key Insights

The changing regulatory climate may affect external investment management decisions
The Department of Labor’s fiduciary rule may change advisors’ view of investment outsourcing. While two-thirds (67%) of RIA advisors said the new rule would have no effect on their outsourcing decisions, 41% of hybrid RIAs said they are unsure of the rule’s impact and 26% said they plan to outsource more. In the independent BD channel, 49% were unsure and 19% said they would outsource more. A significant 47% of advisors want more education around the new rule.

A consistent and sizeable minority of advisors (40%) finds great value in using third-party providers of investment management solutions, according to findings of the recently released 2016 Study of Investment Management Outsourcing by Northern Trust and fielded by InvestmentNews Research.

Here are the five key reasons some advisors choose to outsource investment management:

External investment management frees time for clients and business development
Overall, 59% of the advisors who completed the study cited having greater time as the number one driver for outsourcing investment management, with 36% specifically citing having more time to spend with clients and 31% citing more time to spend on business development. Advisors at firms of all sizes feel that outsourcing gives them more time: 69% of advisors at smaller firms (under $150 million in AUM), 79% at mid-size firms ($150 million to $750 million in AUM), and 48% at the largest firms (AUM over $750 million).

External investment management provides access to a wider range of investments and strategic outcomes
Close behind more free time as a benefit of outsourcing is the ability to access a wider range of investment strategies (55%), including alternative investments (37%). In this era of ultra-low fixed-income returns, many advisors find the ability to access a broader mix of strategies especially helpful. They also believe that clients benefit from third-party asset management by having institutional quality due diligence and monitoring, opportunities for better investment results, support for tactical allocation, and superior tax management.

External investment management can provide operational benefits
While more time for client service and several investment-related benefits were the predominant reasons cited as advantages of outsourcing, almost one-third of advisors (31%) cited “more efficient growth” for their business as a benefit of investment outsourcing, while others noted its positive effects on staffing (26%), compliance (23%), and technology (19%), as well as the containment of expense in general (17%).

Advisor’s value proposition determines external investment management
For advisors whose focus is anything other than investment management — such as financial planning, retirement or perhaps serving a demographic niche or some other specialty market — investment management outsourcing can be adopted with little business or philosophical disruption.

Advisors who currently do not use third-party investment managers may find that time pressure forces their hand. Those advisors report spending approximately 28 hours a week firm-wide on investment management activities, including manager research, portfolio construction, portfolio monitoring and working with technology. As the advice business becomes more competitive and as other business functions consume more management time, the use of third parties may have to be reexamined.

To learn more about this research as well as insight into why advisors choose not to outsource investment management, download the white paper, External Investment Management: Now, Never or When?