By Sanlam

The operational benefits of having an advisory firm’s investment proposition run by a third-party investment manager are increasingly well understood. Typically, this means using a discretionary investment manager to run a discretionary model portfolio. These operational benefits include:

  • All clients achieve the changes in their portfolio at the same time, meaning they all get the same price for their investments
  • All clients are treated consistently and fairly
  • Important changes to asset allocation and investments can be made in timely fashion, avoiding some of the worst that markets can throw at us and taking advantage of investment opportunities
  • The administrative goose chase of getting client affirmation to portfolio changes is removed and client contact for the adviser can concentrate on advice and building relationships, not administration
  • Removes ‘key person risk’ in advisory business, where a small number of people are responsible for the investment research and maintenance of portfolios

Despite these benefits, some IFAs are reluctant to outsource. This hesitancy seems to stem from a perception that outsourcing leads to a loss of control and an emotional attachment to a traditional advisory approach that seems to work.

Let us take these two in turns – loss of control.

Even in an advisory proposition, the IFA isn’t the investment manager. He or she is already outsourcing to fund managers, but deciding to keep all the administration hassle of moving funds around. This isn’t control, it is a comfortable familiarity that is of little benefit to clients and does nothing to add value to an IFA business, perhaps quite the opposite.

We need only ask firms interested in acquiring IFA businesses – they much prefer a tightly controlled streamlined centralised investment proposition managed by an investment manager and this is reflected in the sale price.

The other aspect of control is client ownership. Using a DFM on a wrap platform does not threaten the IFA’s position. Indeed, DFMs have no sight of any underlying client data. This is a red herring.

Attachment to sticking to what has worked in the past is a barrier for some advisory firms taking the outsourcing step. That’s a bit like saying you quite like riding a horse and it works and ignoring the opportunity to drive a car instead even though it would get you to your destination more quickly and efficiently. There are even research companies out there supplying advisers, at a cost, to encourage them to keep riding the horse in the hope they don’t notice the car is a better option.

Clients value the advice and reassurance advisers give them. Achieving a client’s lifestyle objective is very powerful. This is what clients value and pay for, not portfolio administration.

Developments in outsourcing also mean that advisers will be pleased with how this option is evolving. At Sanlam, we find that advisers are particularly interested in developing a wealth proposition that supports their overall client proposition and brand. Done carefully, this is a more sophisticated approach to outsourcing and can reinforce the loyalty to the IFA’s brand.

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Sanlam is a trading name of Sanlam Private Investments (UK) Limited (registered in England and Wales 2041819; registered office: 24 Monument Street London EC3R 8AJ). Authorised and regulated by the Financial Conduct Authority. The value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.