latest Content

Why outsourcing investment research makes sense

Robert Love of Asset Intelligence Research outlines the potential benefits of outsourcing investment research and keeping the process in your control

In the post-RDR era of increased scrutiny and higher professional requirements, financial planners cannot afford to provide investment advice without rigorous and up-to- date investment research and analysis. However, the costs of setting up and maintaining a quality in-house research team are simply too high for many small and medium-sized advisory firms, and can be an unnecessary expense burden even for larger companies amid tighter regulation.

Furthermore, time consuming research can take financial advisers away from the activities that their clients value the most. According
to research by JP Morgan Asset Management, clients are mainly concerned with having a financial planner they can trust to provide good advice when required and that is delivering good performance. More technical aspects of the
job, including research into products, providing analysis, and handling administrative work, are fundamental services, but less likely to generate perceived value and client loyalty.

As a result, outsourcing investment research
to an independent provider has become an increasingly attractive recourse for adviser businesses looking to focus on their high-value, client-facing activities and trim costs. Indeed,
a survey of around 250 advisers by asset management company Investec in late 2012 found that, while 47% outsourced client portfolios at that time, that would rise to 57% after RDR came into effect.

There are several benefits to outsourcing part of the investment process:
• Expanded investment universe: Under new RDR rules, independent advisers are required to research all retail investment products that could be suitable for the client’s needs, not just those that the planner may have traditionally been most familiar. Outsourcing investment research opens up quick access to robust, expert analysis of the wider retail investment universe – including passive funds, offshore funds, investment trusts, ETFs and so on.
• Transparency: With the Financial Conduct Authority (FCA) keeping a close eye on the processes behind investment advice, contracting a firm with experience and expertise in the implementation of centralised investment processes – as well as the analysis of more complex investment structures – together with a clear pricing structure for their services is key.
• Consistency: Investment advisers that rely on their own, in-house research may not be working within a standardised and sufficiently robust framework, thus hampering the ability to effectively compare investment options for diverse client needs. A dedicated provider can help ensure consistency across research processes and recommendations, crucially leading to more consistent client outcomes – reducing the risk of off-piste financial planning.
• Face time: Building and maintaining a healthy client relationship is essential in
a competitive landscape,
and a core competency of
any financial planner. By handing over the monitoring of asset classes, markets and portfolios to a reliable external expert, advisers will free up time to meet with existing clients and network for new business.
• Reduced costs: Running an in-house research team capable of meeting RDR standards for rigour and clarity is an expensive endeavour, especially as increasingly savvy consumers are demanding higher-value from their financial planners.
• Client segmentation: Using independent research specialists can improve an adviser’s ability to offer services better tailored to the needs and profiles of distinct client groups, without any major impact on profitability.
• Training: Outsourcing to expert providers
can improve financial planners’ understanding
of a wider range of products and investment proposals, enhancing their ability to deliver reliable and profitable client solutions. Choosing
a specialist investment consultancy that is committed to training and improving both adviser and client understanding is therefore important.

How far out do you go?
The decision to outsource is just the first step; deciding what exactly to delegate to third parties requires a thorough internal evaluation of the advising business’ strengths and weaknesses, always in relation to client needs.

Hiring discretionary fund managers (DFMs) is a popular and increasingly common practice for advisers looking to outsource day-to-day investment management of client portfolios. However, this is not necessarily the best solution for all clients, especially given the extra costs involved. Investment advisers, in turn, may risk becoming seen as a middleman, struggling to justify to clients what value they are offering.

An alternative is to insource independent investment research – that is, bringing in external professionals to underpin the research behind portfolios generated in house – crucially this allows the adviser to maintain control of the client assets as well as to have ongoing input into the investment strategy and approach. Employing
an external research function will also tend to attract a fixed monthly fee, rather than a charge on assets under management, which in turn can also reduce overall portfolio running costs, and advisers can pass these savings on to clients. This research model gives financial planners peace
of mind in meeting their post RDR investment research requirements, without the adviser needing to sacrifice their proximity to the client or incurring the costs of a full-time research team.

Making it count
To realise the full benefits of outsourcing, it
is essential to find a provider that is aligned philosophically with the investment management proposals of the adviser business. Whether the investment strategy is active or passive, income or growth, UK biased or truly global, there needs to be an agreement in order to increase research rigour and reduce regulatory risk.

Checking the credentials of the individuals involved in the research is also vitally important, as is verifying that those leading the research processes have plenty of commercial world investment experience and cross-checking all information with the provider’s other clients.

Flexibility is another key consideration; rather than shoehorn clients’ needs into an off-the- shelf proposition, financial advisers can add significant value by providing a solution that is carefully matched to the needs and their client segments and risk profile categories. The ability to offer a differentiated proposition aligned to clients’ profiles and circumstances with a clear USP is especially important given the increased availability of online ratings and portfolio tools for free, which lessen the value of more generic investment research.

A smaller, independent research provider can tailor its proposition to these specific requirements. The advising business’ investment philosophy can be directly incorporated into the advisory firm’s investment proposition.

At Asset Intelligence Research, for example, our analysts and researchers often sit on the Investment Committees of client firms, helping us to gain crucial insight into the culture and strategy of the advising business.

With investment decisions arrived at on a committee/consensus basis, a robust governance framework ensures that tailored research represents the broader philosophy of the advisory firm whilst meeting clients’ needs on a carefully documented and structured basis.

Finally, a good research provider must be able to provide regular and clear portfolio reviews and research reports to justify their ongoing fees.

Implemented correctly, outsourcing your investment solution can make life easier, drive business efficiencies, and underpin improved client service. But it is not a panacea: ultimately, every financial advising business must develop an investment proposition that best serves the client needs and fits the company’s unique set of existing resources and capabilities.


A London-based firm dealing with investment and pensions and with approximately £100m AUM found great benefits to outsourcing its investment research to an independent provider. In particular, the firm saw the advantage in using a research provider that was able to tailor model portfolio research, as well as construction and ongoing review frameworks to fit its in-house investment philosophy, offering well matched solutions for different client segments and risk categories.
Among the benefits found were:

• Clearly defined and robust investment proposals tailored to different client needs yet always underpinned by rigorous research.
• Knowledge and expertise of a broader asset universe that enabled financial planners to improve their own understanding of more exotic proposals and offer reliable and profitable solutions to clients.
• Confidence in scrupulous and consistent research processes that are fully documented and regularly reviewed.
• The timely receipt of quarterly portfolio updates, and model portfolio review reports that were very popular among clients.
• Ability to focus on client-facing activities, which enhance service and improve customer relationships and loyalty.

By relieving itself of the time and financial burden of producing high-quality and reliable research to back its investment proposals, this IFA business was able to focus on delivering a clearly differentiated and profitable proposition to its clients.

For more information go to:

More Articles Like This