Financial Advisors Report Positive Client Response to Investment Outsourcing

Financial advisors who outsource investment management activities to external providers overwhelmingly say their decision was greeted positively by clients and in most cases has led to business growth, according to a new study by Northern Trust.

In the report, “Investment Management Outsourcing: Impact on Clients,” 92 percent of advisors say that clients responded positively when they initially heard of the firm’s decision to outsource; 80 percent reported no clients were lost in the transition to outsourcing; and seven out of 10 advisors say their business grew as a result of their decision to use external providers for at least a portion of their investment management activities.

The new research reaffirms the positive views of outsourcing found in earlier Northern Trust surveys of advisors, with 90 percent of respondents satisfied or very satisfied with the experience. A majority of respondents (57 percent) said outsourcing frees up more time to spend with clients.

“Advisors tell us that the best use of their time is working with clients,” said Eric Schweitzer, Managing Director of the Financial Intermediary Practice at Northern Trust. “Outsourcing is gaining in popularity because it accommodates the time that advisors need to spend with clients while also assuring that investment portfolios benefit from specialist expertise as well as advisor oversight. It’s a win-win arrangement.”

The study is Northern Trust’s third biennial report on financial advisor use of investment outsourcing, following up on 2010 and 2012 surveys. The 2014 study is based on responses from nearly 200 financial advisors with assets under management ranging from under $50 million to more than $1 billion. Among those who have decided to outsource:

• Just over half (53 percent) of advisors outsource via turnkey asset management programs (TAMPs), and more than two-thirds (68 percent) say they partner with or outsource to multiple firms.
• 29 percent of respondents outsource all investment management activities, and 57 percent say they outsource just specific asset classes and strategies. Back-office operations, investment manager research, product selection and portfolio monitoring all are among activities that are being outsourced.
• Half of the respondents (48 percent) outsource more than half of their clients’ assets.
• Four out of 10 advisors say they outsource investment activities on all client accounts. Those who selectively outsource are likelier to outsource large accounts, new accounts and accounts employing alternative strategies or complex portfolios.
• The primary decision drivers for outsourcing have changed, with “access to alternative investment expertise,” “portfolio construction” and “portfolio monitoring” at the top of the 2014 list. In 2012, the top three reasons were: “access to asset allocation models,” “access to managers we could not access on our own,” and “potential to generate alpha through best investment ideas.”

Among survey respondents who do not outsource investment management, 56 percent say in-house management is central to their firm’s value proposition to clients. Non-outsourcing advisors report spending a significant amount of time on investment manager research, portfolio construction and monitoring, working with technology and related activities. The toll is greatest on advisors from larger firms, half of whom spend 20 hours a week on key investment management tasks.

While 31 percent of those who do not outsource say solutions would need to be more affordable for them to consider the option, one-third say their position on outsourcing will not change.

ABOUT THE SURVEY

Over a three-week period in November and December 2013, nearly 200 advisors responded to a survey of AdvisorPerspectives.com subscribers. Answers to the survey’s first question split respondents into two groups: those who outsource and those who don’t. Analysis of the research included consideration of the advisors’ firm type (independent financial planning/investment advisory, RIA or regional broker-dealer), firm size (our smaller firms label applies to those with $150 million in assets or less, larger firms have $150 million in assets or more) and compensation model (asset-based or a combination of commissions and fees). Financial advisors used the survey’s comment fields to add additional considerations or elaborate on their responses. Their verbatim comments appear throughout the report.

To download a copy of the full research report and for more information including an infographic, videos and links to previous surveys, see www.northerntrust.com/outsourcing.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. Northern Trust, a financial holding company based in Chicago, has offices in 18 U.S. states and 18 international locations in North America, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2013, Northern Trust had assets under custody of US$5.6 trillion, and assets under investment management of US$884.5 billion. For more than 120 years, Northern Trust has earned distinction as an industry leader in combining exceptional service and expertise with innovative products and technology. For more information, visit www.northerntrust.com or follow us on Twitter @NorthernTrust.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at http://www.northerntrust.com/disclosures.