FlexShares Survey Finds Financial Advisors Highly Satisfied with External Investment Solutions
RIA channel expanded investment outsourcing at a higher rate than IBDs
One-third of advisors outsourced investment management for the first time during the pandemic
The survey of over 500 advisors found that firms using external managers have been highly satisfied with their experience, often choosing to increase their level of outsourcing over time. In the past two years, nearly all firms already using external managers either increased their outsourcing activities (50%) or kept them consistent (49%). Ninety-five percent of firms reported being ‘satisfied’ or ‘very satisfied’ with their outsourced solutions, and a majority (53%) directly correlated their outsourcing activities with allowing them to generate more revenue.
RIAs Report Greater Outsourcing Growth
While a smaller proportion of registered investment advisors (RIAs) choose to outsource as compared to independent broker-dealers (IBDs), the RIA subset is beginning to rely on third-party providers at a rapidly increasing rate. In 2022, 32% of RIAs now outsource as compared to 27% in 2020. This figure has remained largely unchanged for IBDs at around 50%.
RIAs also reported higher levels of outsourcing as a percentage of assets under management (AUM). On average, RIAs outsource approximately 50% of AUM while IBDs outsource 39%. This increased adoption may be a function of business size. As RIAs tend to be smaller enterprises, many need greater external support amid recent market disruptions.
Within each advisor channel, there are also differences in what the firms are choosing to outsource. RIAs are more likely than IBDs to outsource back-office operations (25% vs. 15%). By contrast, IBDs put more of their outsourcing efforts into investment manager research (38% vs. 22%) and due diligence/monitoring (27% vs. 17%).
Outsourcing Increased Amid Covid-19
The 2020 iteration of this survey asked firms who handle investment management in-house whether their opinion of outsourcing had changed as a result of the pandemic - 15% of respondents said they plan to increase their usage of outside managers and 85% would reconsider doing so. Two years later, a significant number of firms have been shown to have ultimately chosen to start outsourcing investment management.
In this year’s survey, about one-third (34%) of advisors said their firm outsourced investment management for the first time during the pandemic. These firms likely turned to external managers to cope with the high turnover and instability of this period, even if they hadn’t outsourced before. Furthermore, firms that were already outsourcing before Covid-19 knew they could rely on external services – almost a quarter (23%) reported that they increased outsourcing during the pandemic.
“While the trend towards investment outsourcing had already been gaining momentum as advisors shifted towards more holistic financial planning activities, outsourcing is also proving to be a source of stability in more turbulent market conditions,” said
The Future of Outsourcing Adoption
While the overall share of advisors choosing to outsource has remained highly consistent over time, attitudes towards outside managers continue to shift favorably and may suggest further adoption in the future. Firms that don’t outsource today are becoming more open to it – the number of firms ruling out investment management outsourcing has consistently declined over the past five years.
When advisors were asked what would change their opinion, affordability remained the top factor. However, the focus on cost appeared to be receding in favor of the quality of options available. This year, the importance of a “broader range of solutions” was favored by almost a quarter of respondents, as compared to 17% in 2020.
About the FlexShares Race to
To conduct this year’s survey, the seventh in a series examining advisor views on external investment management, FlexShares worked with Informa Engage, which fielded the survey to advisors and closely related professionals
To download a full summary of results and receive more information, visit www.flexshares.com/outsourcing.
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