Financial advice CEOs debate pros and cons of investment outsourcing  

On the one hand they are obliged to bolster their investment capabilities, yet on the other they must keep fees low. This challenge was the underlying theme of a recent roundtable discussion about investment outsourcing, where CEOs and managing directors of national financial advice firms gave contrasting views of the pros and cons.

While wealth management firms have steadily been outsourcing more to specialist investment managers for the past decade, the Financial Conduct Authority (FCA) ratcheted up the pressure on 31 July when it introduced the new Consumer Duty¹.  This is likely to encourage still more outsourcing, according to the roundtable participants.

Billed as one of the biggest shake-ups in financial regulation for a decade, the Consumer Duty puts delivering good financial outcomes for the consumer at the heart of everything financial firms do. Crucially, they must be able to provide evidence of this. 

Consolidating and outsourcing the investment process can help to create a consistent investment process and to demonstrate that the consumer’s outcomes are being prioritised. Yet there are concerns over costs and a loss of the ‘independence’ that’s highly valued by some financial advisers.

Financial advice firms have been merging furiously in the past few years. But our roundtable highlighted how this had often left a diverse collection of investment teams within one firm. Spurred on by the Consumer Duty, some firms are now considering how to bring their investment proposition together to have what’s called a ‘centralised investment proposition’, with consistent outcomes for all clients. This makes it simpler to match low, medium and high risk investment offerings to clients’ risk appetites.

There’s no single way that this is being done, the participants explained. Some firms outsource to a discretionary investment manager, or more than one for example. Some build in-house discretionary investment teams. Others opt for hybrid approaches, with in-house teams determining asset allocation, but fund selection being outsourced.

Speaking in favour of outsourcing, one CEO described using the services of a global investment consulting firm. He cited the benefits of the huge expertise of a team of specialist investors, alongside the attractions of institutional-level pricing. Indeed, Mercer echoes this, as we manage $340 billion globally and use our scale to negotiate competitive terms with fund providers to the benefit of our clients.

Yet some advisors made clear that they still value investment independence highly. This argues against both the desirability of moving towards centralised investment propositions and outsourcing. There was concern about costs. “One has to look at how many mouths there are to feed,” was the way one expressed himself.

More specifically, some participants spoke of their growing need for expertise in decumulation strategies, especially following the FCA review of the advice consumers are receiving on meeting their income needs in retirement. With many clients aged 60 and over, our participants debated the attractions of low-risk multi-asset solutions that can slowly be drawn down as alternatives to annuities.

One interesting observation from the discussion was how the term “outsourcing” is used in multiple ways in the industry and importantly, interpreted differently.  There was consensus on the need to better define what is actually being done in practice.

When it comes to the central challenge of strengthening investment capabilities with managing costs, evidently there is a balance to be struck. Each firm will decide on the approach that suits it best. 

What’s evident from the roundtable is that the Consumer Duty is putting pressure on national financial advice firms to review how they provide investment advice. How can they reconcile the best possible consumer outcomes with low costs and competitive fees?

Our debate suggested that investment outsourcing will increase, although it’s not for everyone. It can provide institutional pricing and expertise but some advisers still prefer in-house control. 

Mercer’s consultants can provide clear evidence about the benefits and costs of outsourcing, as well as the options available. Get in touch for more information.

This article is based on the debate at a roundtable called Party Lines – The Pros and Cons of Outsourcing. This took place at the Meeting of Minds: Advisory Distributors conference held in November 2023, it was sponsored by Mercer.

References

1. https://www.fca.org.uk/firms/consumer-duty