Earlier this month FTAdviser published an article based on our own research that rebuffed claims of rapid growth in investment outsourcing by advisers, which specifically questioned the inferences drawn by Skandia from its own independent study of advisers.
We recently released data following our regular survey of financial advisers suggesting £141bn could be held in outsourced investments by the end of 2016. This was based on research conducted in November 2013, which surveyed over 200 financial advisers.
There are many survey-backed claims made in the media. For example, the same day our news was reported, there was also research claiming that British men had reached ‘peak beard’. So, I’ll stick my (clean shaven) neck out and say I think our claims are towards the more credible end of the scale.
Of course, we had looked at advisers’ future intentions and extrapolated to reach a number on the size of the future market. FTAdviser, being journalistic types, challenged that data, suggesting instead that the growth in the use of outsourced investments will be far more gradual.
So who is right? I’m no Tim Harford when it comes to forensically analysing research and the honest answer is probably that no-one knows for certain.
What is certain is that a lot depends on your definition of ‘outsourcing’. We had used it in its widest sense, meaning to outsource any elements of your investment process, be that fund selection, asset allocation, portfolio management, or all of the aforementioned.
Certainly our platform flows into the multi-asset sector, which is consistently the fastest growing in terms of net sales, suggest that the appetite for outsourcing elements of asset allocation - and fund selection to a degree - is growing.
So should advisers be outsourcing investment management?
Financial planning is undoubtedly a specialist profession, and professional qualifications such as Chartered Financial Planner reflect that status. Financial advisers that are both expert financial planners and qualified investment managers are probably in a minority.
Investment management is a very different proposition from financial planning. True, tax and product rules can be complex and prone to change, but not minute by minute.
Consequently, investment management - that is to say portfolio construction and fund selection, as opposed to asset management - can introduce a layer of risk to an adviser’s business that is difficult to mitigate without outside help (or an expensive hire).
It is perhaps no surprise that financial planners are increasingly looking to delegate (but not abdicate) responsibility to those for whom investment management is a core business activity.
Whether or not we will see rapid growth in outsourced investment management over the coming years remains to be seen, however, it would seem to me to be a sensible direction of travel as professional financial planners turn their attention increasingly towards client relationships and their financial planning needs.
Furthermore, research from Vanguard in March 2014 has started to quantify the alpha that an adviser can offer to a client. A relationship-orientated, disciplined approach to financial planning can add “about 3%” in net returns relative to the average client experience, with over half of this alpha coming from implementing spending strategies and behavioral coaching.
