Depending upon which studies you look at, somewhere between 25% to 50% of all advisors outsource some or all their investment management functions. But outsourcing is not for everyone.
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?” If you became an advisor because you have a passion for investing, you are probably not a good candidate for outsourcing. Why deprive yourself of the activity that brings you joy?
If your passions lie elsewhere, however, you should at least consider outsourcing. You could effectively buy back a significant number of hours each week and spend them interacting doing the things that are at the top of your priority list. 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, consider outsourcing. There are many specialists available that would love to take on this responsibility and relieve you of the burden.
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 to grow your business significantly or make other changes that will require your time and effort, 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.
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.
The Ability to Concentrate 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.
The Ability to Sit 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.
The Ability to Institutionalize 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:
Outsourcing is not free and prices vary greatly among outsourcers. Make sure you net any savings you achieve through outsourcing, against the actual costs of outsourcing.
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.
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.
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.
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 from other advisors.
It is important to make sure you are a good fit to work with any outsourcer you select. Learn about their target market, average account size and per-advisor AUM targets. Be sure they’ll value the relationship.
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.
Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based firm that provides investment management services to financial advisors and their clients. He is a 40-year veteran of the financial services industry. He can be reached at firstname.lastname@example.org.