The Race to Scalability 2022
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.
Results Hopefully Achieved From Freeing Up Time By Outsourcing
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.
Director of Practice Management and Advisor Research
Wealth Management at Informa
Kristin Letourneau, PhD
Vice President, Research
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
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.
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
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
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.
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
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
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
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.
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Foreside Fund Services, LLC, distributor.
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The Race to
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. Learn more about the Race to Scalability 2022 by downloading the report.