Contrary to popular belief, outsourcing investment management by no means represents loss of control. Architas' Cedric Bucher looks at how to cultivate successful partnerships.
As the investment universe grows in size and complexity, the time and specialist knowledge required to research and assess potential investments are increasing by the day.
With this in mind, it comes as little surprise that more and more advisers are deciding to outsource this part of their business.
Outsourcing investment management to a third party brings with it a host of benefits.
How to keep control of your outsourced solutions
The most obvious of these is the time it saves an adviser. A fund house is likely to have an understanding of and access to a far wider investment universe at its fingertips than an adviser, and their experience allows them to identify the viable options more quickly. An adviser can then devote more time to cultivating client relationships and other aspects of their service.
Another key benefit of outsourcing is that it offers an adviser access to the extensive research capabilities of the fund house.
These stretch not only to the investment universe but also to the macro environment. Most fund houses have rigorous management selection processes in place that draw on both quantitative and qualitative approaches.
Feeding into this usually is comprehensive macro research, either conducted in-house or building upon that of specialist researchers. One of the most challenging aspects of investing is timing the market: with access to a host of research and keen analytical eyes, fund houses are usually in the best position to construct robust portfolios.
There is also a cost advantage. Fund houses buy funds or stocks on a larger scale than most advisory firms. As a result of this greater buying power, they are typically able to negotiate better prices, which results in a lower-cost portfolio for the client.
Likewise, we should not forget the tax benefit: investment houses are able to rebalance portfolios in a fund of funds structure without being liable to capital gains tax.
Managing your fears
However, despite all these benefits, some advisers fear that outsourcing part of an investment solution marks the loss of control. We believe the opposite is true. It is important to remember that investment management represents just one part of an overall investment solution.
Advisers still need to focus on client relationships and financial planning. In addition, the responsibility of ensuring investments are still suitable for clients remains firmly with advisers.
A key way to ensure the retention of control is through a collaborative relationship between adviser and fund house, more akin to a partnership than delegation of a responsibility. In order for this to be the case, the relationship needs to be founded on trust, communication and mutual respect.
The careful selection of a fund house is consequently of paramount importance and it represents another aspect that keeps the adviser firmly in the driving seat.
Considerations include the background and specialities of the fund house to ensure they cover the relevant areas of the market. In particular, as the investment industry goes global, advisers might want to consider the fund house’s ability to travel if necessary and research overseas investments. The size and stability of the firm also deserve contemplation, as well as the range of their offering and recent performance.
Last but not least, cost is an important factor.
Naturally, advisers seek to keep costs low for their clients but it is important to bear in mind the level of service provided, particularly in terms of ongoing communication to keep the adviser and the client in the loop. The opportunity to co-brand literature is a good example.
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