Redistributing fewer activities across a greater number of client accountsNew study from FlexShares delves into financial advisors’ views and adoption of external investment management services.
Chicago, IL – November 12, 2020 – Northern Trust Asset Management’s FlexShares Exchange Traded Funds (ETFs) today released its sixth biennial study on financial advisors’ views and adoption of external investment management services. First conducted in 2010, this year’s survey reveals that while the overall percentage of advisors who outsource investment management is consistent over the past decade, the way that advisors leverage external services is changing.
The survey of more than 500 advisors found that the share of advisors using external managers today (41%) is virtually unchanged from 2010 (42%), however the pandemic has encouraged firms that do not currently outsource to reassess their approach. When firms that handle investment management in-house were asked whether their opinion of outsourcing has changed as a result of the pandemic, 15% of respondents said they planned to increase usage of outside managers and 85% said they plan to reconsider the use of external management. While the pandemic has not triggered a significant shift towards third-party investment outsourcing to date, it’s a growing consideration among advisory firms.
More Accounts, But Fewer Activities
Advisors that currently work with an external investment manager are outsourcing a greater number of client accounts, but becoming more targeted in their use. Advisors are more likely to outsource some or all investment strategies for all their accounts, rather than just their largest clients. This all-account approach is the choice of 49% of those who outsource, up from 39% in 2018 and 33% in 2016. However, the overall percentage of client assets outsourced was unchanged from 2018 at 53%. This may reflect a smaller scope of activities employed across a greater number of clients.
There is also a meaningful uptick in the types of accounts being outsourced. In 2020, advisors outsourced 38% of complex portfolios vs. 15% in 2014; 22% of less complex portfolios from 2% in 2014; and 35% of portfolios based on tax considerations, up from 11% in 2014. This demonstrates a growing view that third-party investment management is suitable for portfolios of all sizes and complexities.
Despite using external managers for a greater number of accounts, advisors are becoming more selective in the activities they choose to outsource. The percentage who outsource all activities has consistently declined to 12% of respondents from 50% in 2012. Approximately two-thirds (66%) outsource portfolio management, with product selection and asset allocation also key areas of focus. Some 15% of advisors use external managers for product selection, up from 8% in 2018. When asked for the first time about usage of outside asset allocators, 32% of respondents said they outsource the function.
Alternate Ways To Gain Efficiencies
Though most advisors continue to manage investments in-house, there are several other ways non-investment outsourcers are gaining efficiencies. The survey found 100% of advisors that kept investments in-house outsourced at least one non-investment function, and on average they outsourced 2.6 other activities.
They are increasingly relying on external help for services such as investment product analysis, up to 66% in 2020 from 57% in 2018, reflecting advisors’ desire for support in investment selection. There is also significant growth in outsourcing their marketing function, up to 39% in 2020 from 20% in 2018. Finally, new to the survey this year, 60% of advisors indicated they rely on external help for information technology services.
“Over the past 10 years, we’ve seen a clear shift in the perceived benefits of third-party outsourcing – whether that’s utilizing external investment managers or other non-investment related service providers – as advisors’ expected role continues to evolve from investment manager to holistic financial planner,” said Laura Hanichak Gregg, Director of Practice Management and Advisor Research at FlexShares. “As the investment landscape has become increasingly complex and clients demand more from their advisors, external resources of all types are helping advisors better focus their time on activities for which they add the greatest value.”
The Rise Of Specialized Strategists
To execute on outsourced investment strategies, 61% of outsourcing respondents say they turn to providers of turnkey asset management programs (TAMPs), down from the 67% in 2018, but up from 52% in 2016. Advisors are also increasingly employing ETF strategists, now used by 34% of respondents, up from 23% in 2018 and 29% in 2016. This likely reflects advisors’ demand for services that can provide direction amid the substantial rise in passive investment vehicles over the past decade.
The Role Of Digital Technology
As it assumes a greater role in advisory practices and clients’ lives, technology is shaping advisor decisions about external management. An increasing number of advisors are employing automated digital advice platforms, used by 16% in 2020 compared to 6% in 2018. Issues surrounding ease of use and integration with existing platforms are growing in importance. Of respondents who do not outsource, 17% say that the availability of a user-friendly technology platform would be an incentive for them to reconsider their decision, reflecting the fact that whether they outsource or not, advisors are increasingly becoming comfortable with incorporating digital solutions into their practices.
About the Survey
To conduct this year’s survey, the sixth in a series examining advisor views on external investment management, FlexShares worked with InvestmentNews, which fielded the electronic survey to more than 90,000 advisors and closely related professionals between March 2 and June 4, 2020. More than 500 responses are included in the final report. The sponsor was not identified in the survey.
To download a survey infographic and the summary of results, “The Race to Scalability 2020: Current Insights from a Decade of Advisor Research on Investment Management Trends,” and to register for more information, visit www.flexshares.com/outsourcing.