Global Report

The Race to Scalability 2022

Brought to you by:

Perspectives on this Survey Series

For 12 years, FlexShares has studied how and where advisors are finding efficiencies to better scale and grow their businesses, enabling them to create a better client experience. The body of data that has resulted from these surveys provides a valuable long-term look at how values, practices and outcomes have changed over a decade of rapid change for the advice business. Results of the 2022 survey add to this store of knowledge and are intended to provide insights to help advisors create efficiencies within their business and to help inform decisions when considering the use of external investment management.

This is just one of many proprietary research programs that FlexShares conducts. We encourage advisors to reach out to us for additional insights to help with practice benchmarking. We also welcome contact from asset managers for more understanding of the outsourcing advisor community.

For more details, please visit flexshares.com/outsourcing or contact us at 855-353-9383.

Results Hopefully Achieved From Freeing Up Time By Outsourcing

ONDEMAND WEBINAR

Turning Efficiency into Scale: Trends in investment management outsourcing

This webinar will offer a look at the key findings from the 2022 Race to Scalability Study, which tracks where and how advisors are finding efficiencies to better scale and grow their businesses, enabling them to create a better client experience. This webinar will focus on:

How different advisor channels have evolved in their attitudes toward outsourcing investment management.
The impact of the COVID-19 pandemic on firms’ outsourcing decisions.
The range of investment management activities outsourced and what drives advisors to seek help in these areas.
How the benefits of outsourcing investment management stack up against advisors’ expectations.

Speakers

Laura Gregg
Director of Practice Management and Advisor Research
FlexShares

Mark Bruno
Managing Director,
Wealth Management at Informa

Kristin Letourneau, PhD
Vice President, Research
Informa Engage

By registering for this event you acknowledge that you are a licensed financial professional.

Key Finding

How the Outsourcing Landscape Has (and Hasn’t) Changed

Over time, advisors’ use of third parties for investment management has remained consistent. In 2022, 41% of survey respondents report that they outsource this function, almost the same as it has been for more than a decade.

While the percentage of firms that outsource their investment management function has not changed dramatically over the past 12 years, the undercurrents driving that outsourcing activity have. For example, independent broker-dealers (IBDs) are more likely to outsource than registered investment advisors (RIAs). However, while IBDs are outsourcing at approximately the same rate (50%) as in 2020, 32% of RIAs now outsource compared to 27% in 2020.

Advisors That Outsource Investment Management By Channel

Increased outsourcing during the pandemic.

Interestingly, RIAs also report higher levels of outsourcing as a percentage of AUM. Since RIAs tend to be smaller and more entrepreneurial than IBDs, it’s possible the pandemic pushed them to make more significant changes in the way they do business.

Indeed, one-third (34%) of advisors overall say their firm outsourced investment management for the first time during the pandemic. It’s likely that these firms turned to external managers to cope with the high turnover and instability of this period, even if they weren’t comfortable with outsourcing in the past. And many of those firms that were already outsourcing knew this was a resource they could turn to in a difficult time — almost a quarter (23%) report that they increased their use of outsourcing during the pandemic.

Key Finding

The Impacts of Outsourcing Investment Management

The majority of advisors who outsource investment management focus their outsourcing on portfolio management activities. But variations among types of advisors do crop up: RIAs are more likely than IBDs to outsource back-office operations (25% vs. 15%). By contrast, IBDs put more of their outsourcing efforts than RIAs do into investment manager research (38% vs. 22%) and due diligence or ongoing monitoring (27% vs. 17%).

Some of these differences stem from the value these firms derive from outsourcing—and who they target for those benefits. Advisors have varied perceptions about the value of different types of wealth management services for their clients and their firms.

Wealth Management Services Delivering the Most Value to the Firm

Respondents believe investment management services deliver the most value to their firms (52%), followed by financial planning (43%), and retirement planning (37%).

Wealth Management Services Delivering the Most Value to Clients

However, when asked about the greatest value for their clients, financial planning services come out ahead (52%), followed by investment management (42%) and retirement planning (40%).

Investment Management Still Core For Many Advisors

Frees up time for advisors – IBDs are particularly focused on saving time to spend with clients (50%) or for business development (47%).
Boosts revenues – A majority (53%) of respondents believe outsourcing has allowed them to increase their firms’ revenues. However, more IBDs are confident of this benefit than RIAs (64% vs 52%).
Improves investment performance – RIAs are more likely to see better investment performance (41%) as a benefit than IBDs (31%).

Revenue Impact of Outsourcing Investment Management Activities

Regardless of firm affiliation, a majority of respondents believe outsourcing has allowed them to increase their firm’s revenue.

While providing investment management offers advisors direct economic benefits due to the relatively high asset-based fees they generate, advisors believe services such as financial planning provide more of a premium service and value to clients.

Moving forward, if more firms opt for the financial planning model and are challenged to differentiate based on their investment management capabilities, this could potentially lead more firms to outsource their investments and focus more on bespoke planning services.

Key Finding

Investment Management Still Core For Many Advisors

Using third-party investment managers remains popular — 95% of those who do rely on them report that they are satisfied or very satisfied with the solution. Nevertheless, almost six out of 10 advisory firms keep investment management in-house.

Among firms that have decided not to outsource investment management, the belief that investment research is a part of respondent firms’ core value proposition (30%) remains the most voiced objection. However, the popularity of this rationale has been declining over time – from 52% in 2012 to 33% in 2020 – and in 2022, it reached its lowest level yet.

Developments That Would Lead Advisors to Re-consider Outsourcing

In 2020, a third of advisors wanted investment management outsourcing solutions to be more affordable – this consideration has now dropped to 28%. While affordability is still the most important factor for firms reconsidering their approach, that focus on cost appears to be receding in favor of the quality of options available. Instead, this year, the importance of a broader range of solutions is favored by almost a quarter of respondents, compared to 17% in 2020 and 14% in 2016. It’s possible that, with increasing market volatility, advisors are seeking out a broader range of solutions for their clients.

Key Finding

WealthTech Platforms Slow to Rise

At the moment, very few respondents are using a WealthTech platform (16%), but another 22% are planning to do so within the next two years. A majority of firms (53%) cited new technology and automation as their top reason for deploying WealthTech in 2020 at 53%. In 2022, that number has fallen to 40%, behind remaining competitive in the wealth management market (46% in 2022 vs. 50% in 2020). Attracting new clients in new segments has also gained prominence among advisors, cited by 41% of respondents in 2022.

Firm’s Primary Drivers for Utilizing a WealthTech Platform

Absent an external catalyst, firms seem generally satisfied with their current WealthTech offering. In 2022, they cite a need to see increased demand from current clients (38%) as well as increased demand from prospective clients (36%) as the top reasons they would consider changing WealthTech platforms.

Key Finding

ESG Becoming a Focus

A November 2021 survey of investors demonstrated widespread interest in ESG and revealed a gap in advisor recommendations – 72% of respondents said they were somewhat or very interested in sustainable investing but only 13% had received ESG suggestions from their advisors. Instead, investors are exploring this area on their own by consulting media sources and other research. Others still are open to the possibility — 57% of investors who aren’t currently interested in ESG said they would change their minds if their advisors suggested it.

Client Interest in ESG over the Last 12-24 Months

The growing demand for more ESG investment products sits in stark contrast to advisors’ anxiety about the trend. External managers with expertise in ESG investing, particularly renewable energy, could be a natural fit to help bridge this gap.

Takeaways

Over the 12 years that FlexShares has studied how advisors create efficiencies to grow their business, we’ve seen little change in the proportion of advisors who choose to outsource. But the outsourcing landscape is more dynamic than this persistent trend would suggest.

The most pronounced growth has been among those who already chose to outsource. This trend speaks to the increasing time constraints advisors face. As a result, those already comfortable with outsourcing have turned to this solution more frequently in order to better focus their limited time on what they do best.

Expectations in terms of the direct impact of outsourcing on revenue and performance might be another clue to this puzzle. Advisors who are already familiar with the benefits of outsourcing and have external manager contacts handy have been able to use this resource to pivot and flex during the instability of the pandemic. Communicating the value of outsourcing in these times and resetting expectations may increase the proportion of advisors who rely on third-party managers to give them the tools or freedom to intensify their focus on client relationships.

About This Survey

To conduct this year’s survey – the seventh in a series examining advisor views on external investment management – FlexShares worked with Informa Engage and Wealthmanagement.com to field an electronic survey to more than 248 advisors and closely related professionals across the United States between January 10 and February 1, 2022. By the end of the survey period, 570 individual responses were received and included in the final report. The sponsor was not identified in the survey.

IMPORTANT INFORMATION

Before investing, carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information is in the prospectus and a summary prospectus, copies of which may be obtained by visiting www.flexshares.com. Read the prospectus carefully before you invest.

Foreside Fund Services, LLC, distributor.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.