Insource or outsource? Who’d be an adviser?

I am not an adviser; I do not want to be an adviser; quite frankly, I haven’t got the balls to be an adviser. Pre-FSA 1986, I ran a nicely profitable consultancy, largely in group pensions with some individual work. My last transaction was investing a six-figure sum in equities hours before the ’87 crash.

I wasn’t happy with the transaction, thinking markets were toppy. However, an accountant introduced the client and the client was his mother. The instruction was to invest! I was not happy then, afterwards and I am not happy now. This is why, inter alia, I am not an adviser.

Today most advisers outsource or insource expertise. Relatively few advisers carry out asset allocation and fund selection themselves. Personally, I can’t imagine why any adviser would want to. Leave that to those who can read the runes. So what is the right answer?

Ignoring bespoke stuff, which should really only apply to those with (1) special individual needs e.g. large immoveable holdings elsewhere AND (2) large portfolios, most solutions revolve around a selection of asset allocation models and a fund selection process. You can run this as an IFA using bought-in asset allocation and fund selection tools; you can go to an asset manager for a packaged/OEIC solution i.e. multi-manager; you can go to a discretionary manager. In essence, these are the same solution with different packaging – if you ignore all the industry bull—t!

The FCA is concerned how outsourcing choices are made; they are concerned about due diligence in process, about suitability and they are concerned about the use of platforms where packaged solutions are recommended. PI insurers are becoming equally concerned. I am delighted I never became an IFA!

When we have looked at IFA criteria for selecting external experts and tools, we have found little consistency of process and criteria.

For many, cost is not an issue. This may be because it is often very hard to identify total cost. But cost is important. This heading was in one of today’s online trades:

“DFMs under pressure over portfolio charges as FCA considers review”

There is also some (I did say “some”) ignorance of cost. When asked the TER or OCF of his favoured multi-manager fund recently, an adviser answered .75%. The published OCF is 2.3%. That is before adviser and platform charge. Do the math! The equity premium over the last 100 or so years is 3-3.5%.

Most will argue that performance is important, but some recommend managers who do not publish auditable performance figures.

Then there is the issue of tax. How many advisers put their HNW clients’ unwrapped assets in OEIC funds (multi-asset or multi-manager) to avoid CGT on transactions within the portfolio?

How many advisers harvest CGT gains on funds to utilise the allowance?

How many advisers consider the impact of tax on equity dividends and bond interest when investing across wrapped and unwrapped portfolios?

Who’d be an adviser? I wouldn’t.

The FE Investment Summit sets out to address these issues, if you’d like to come along you can view the brochure here

You can also get involved in our discussion forum on this very topic run by the estimable Mark Polson here

11 Comments
  1. Phil Billingham 3 years ago

    Late to the party here, but have interacted with Clive in other media.

    My personal summary is:

    1. This is not as difficult as many make out…
    2. …. but it does require a proper process
    3. The noise from the advertising / investment industry tries to tell us that the real ‘Granular’ choices of fund and fund manager really matters, where often other areas of advice, correct asset allocation, and managing cost can be a lot easier to ‘industrialise’ in smaller firms and more important to the outcome
    4. There is some great data out there – FE / Morningstar etc – at a cost. It’s better to pay the cost than rely on ‘free stuff’
    5. Even with all this, the role of Planner is, in my opinion, the best in the business, despite having to deal with Providers and the FSCS. It’s all about the clients

    Have a great weekend

  2. Clare Evans 3 years ago

    Many of the IFAs I work with are outsourcing parts of their business. Makes sense financially and time wise and allows them to spend more time with their clients and doing what they’re good at.

  3. Phil Melville 3 years ago

    HI Clive,

    I also agree with Phil Wise and am a little surprised at your position on this given that you are promoting a really wonderful product set from FE.

    There are so many tools available these days of which I think FE is at the top end that you have to wonder how anyone can purport to give financial advice if they cannot incorporate these easy to use investment technology based tools as an integral part of their work.

  4. Damian Davies 3 years ago

    Something we are seeing increasingly is individuals building investment portfolios for IFAs.

    This is outside of the issues here, but I wonder whether, actually, the issues are similar?

    If an adviser engages an individual to build a portfolio, or model portfolios, has consideration been made to the effect of the individual suffering something catastrophic?

    We all know that building portfolios is a small part of the process – the continual monitoring and challenging of the portfolios is what is important.

    Don’t know if that is perhaps a slightly different issue to this, but it was what popped into my mind.

    • Craig Davidson 3 years ago

      Agree entirely with Philip. Everyone tells us its too difficult, but if you are serious about the job, you do it. We use Morningstar, and we build our own portfolios and pick our own funds, and do our own reviews. Its not hard, just takes a bit of effort.
      Don’t listen to the vested interests. Do the job properly.

  5. Author
    Clive Waller 3 years ago

    Chris, hi
    Glad you agree with sentiment.
    Re outsourcing, our last research showed that one third never outsource, one third sometimes outsource i.e. outsource part of proposition or one or more segments, and one third always outsource. One could go into more and more detail, but we regard outsourcing as when any outside agency carries out asset allocation and fund selection or provides the IP for it. Whether one agrees with our methodology is, to some extent, semantics – I could argue against it! The more important point is that we have used this methodology for some 8 years and can thus track trends on outsourcing reliably.
    One can take this further as we see large firms, nationals and networks, becoming more and more prescriptive on the use of centralised propositions where most IP will be external. For this reason, many (most?) are moving or will move to restricted status.

  6. Philip Wise 3 years ago

    I’ve always been a bit puzzled as to why advisers would outsource asset allocation.
    My experience is that it isnt difficult (there arent many asset classes and they dont change much). Technology like FE Analytics has made it miles easier too.
    Add to that the fact that fund selection within an asset class isnt very important or difficult (again particularly as a result of technology).
    There are lots of people out there whose job is to make it sound difficult, to justify their fees (e.g. discretionary fund managers/sellers of multi-manager funds). They and the compliance firms are quite good at scaring people into believing they cant do it themselves.
    I’m surprised that none of the industry consultants are offering a service to advisers who want to do it themselves – it’s not difficult to set down your investment philosophy (most advisers already have one in their heads) and then to draw up asset allocation models following that philosophy. I think many advisers struggle with writing down what is in their heads in a structured manner (well, I did, anyway) and could do with some help from a consultant on this. I’m sure a consultant could design a “design your own investment process” course and add real value to advisers, rather than just towing the line of “it’s too difficult for you lot”

    • Benjamin Fabi 3 years ago

      Philip, I think that Cormorant Capital offer a service such as the one you describe, as well as then creating asset allocations and model portfolios based on the given philosophy (or leaving the adviser to do either of those bits themselves).

      I’m sure there are others, but I suspect that they get lost in the noise made by the people making it sound more difficult than it needs to be.

  7. Chris Budd 3 years ago

    Agree with this article very much Clive, and well put. But would just quibble with the ‘most advisers outsource’ assumption. ‘Many’, sure, but ‘most’?

    This blog I posted 18 months ago in these very pages may have some relevance http://www.adviserlounge.co.uk/2012/12/20/who-decided-that-ifas-are-not-investment-experts/

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