For 12 years, FlexShares, a provider of ETFs and related tools, has studied how and where advisors are finding efficiencies to better scale and grow their businesses. This 2022 survey of 570 advisors makes it clear that an existing trend – outsourcing investment management – is increasingly seen as a source of growth.
Many advisors are “using the time afforded them by outsourcing to focus on more personalized planning with their clients to deepen the client-advisor relationship,” says Laura Hanichak Gregg, Director of Practice Management and Advisor Research and Co-Host of “The Flexible Advisor” podcast at FlexShares. “We’ve found that to be able to retain clients you need a good relationship. Outsourcing enables advisors the time to better get to know their clients and understand their goals and concerns.”
Gregg notes that during a bear market, anxious clients find comfort “in the extra time that advisors spend with them,” as evidenced by the 95% of firms that reported being “satisfied” or “very satisfied” with their outsourced solutions in a past survey in the 12-year series.
Over the past two years, 59% of RIAs already outsourcing increased their use of third-party providers. Gregg sees a direct connection between the pandemic and the rise of outsourcing. “As the investment landscape has become increasingly volatile, many firms have utilized external resources for the first time or expanded their existing activities, perhaps as a way to cope with recent disruptions,” she says.
The survey bears this out: 32% of RIAs rely on third-party providers in 2022, compared with 27% in 2020. RIAs also report higher levels of outsourcing as a percentage of assets under management (50%) than another group, independent broker dealers, that regularly uses third-party managers. Gregg highlights the “shift toward more holistic financial planning activities” as a primary reason why outsourcing by RIAs is “proving to be a source of stability in more turbulent market conditions.”
The most cited objection among advisors that have decided not to outsource investment management is a belief that investment research is part of their firms’ core value proposition (30%). However, the popularity of this rationale has been declining over time – from 52% in 2012, to 33% in 2020, to its lowest level yet, in 2022.
Gregg believes that this trend will continue, because during volatile times relationships become more complicated when an advisor is also a client’s money manager. Outsourcing allows advisors the flexibility to assess the performance of external mangers and make changes as needed.
That said, Gregg doesn’t believe that outsourcing is for everyone. “For advisors who are passionate about money management, it may make sense for them not to outsource,” she says. “Those who really enjoy client interaction may find an external money manager is the way to go. What brings you joy usually brings you success.”
Benjamin Lev is a freelancer at RIA Intel and based in New York City.