Portfolio Adviser • Portfolio Adviser Magazine February 2022 • On the money

For many financial planners, ‘outsourcing’ is out of date, a redundant description that was inaccurate in the first place. This has been driven by the success of financial advisers evolving into financial planners – and with it the fundamental value their clients pay for has changed.

They now help navigate that plan with clients to help them achieve lifestyle goals. This is different from selling a product – but this evolution has not moved at an even pace for all advisory firms.

The term ‘outsourcing’ has become common parlance to describe – inaccurately – what happens when an independent financial adviser deploys the services of a discretionary fund manager (DFM).

Under Financial Conduct Authority (FCA) regulations, a firm can only outsource to another firm something it already has permission to do itself.

For example, if a firm is advisory-only, it does not have permission to act with discretion as a portfolio manager. It cannot outsource to a discretionary investment manager. It can refer the client to a discretionary service, but this is not outsourcing.

Therefore, as an adviser, I would be careful not to say to the FCA or your professional indemnity provider that you are ‘outsourcing’. You are not.

There is little difference to the client if a multi-asset risk-targeted fund is recommended directly without referring them to a DFM. Yes, the multi-asset fund is one single collective, but it will have a similar spread of assets to that of the DFM portfolio.

An adviser recommending the multi-asset fund would probably say they are not outsourcing. The irony i s that i f we continue with the misuse of this term, then making a recommendation to any fund is outsourcing, ie the investment function is outsourced to a fund manager. The whole discussion then is somewhat confused.

For advisers who have not made the journey to a financial planning service, there is greater emphasis on providing an investment service.

If clients perceive they are buying an investment solution, then the advisory firm is likely to spend a lot of time demonstrating it is delivering value in selecting and overseeing investment managers, but it is not the investment manager.

If we remove the outsourcing label and focus on the most efficient way to deliver an investment solution to the client, we are more likely to deliver value and run a more profitable business.

The most inefficient approach is to create a bespoke advisory portfolio for each client. The research, suitability reports etc will all take a lot of time to prepare and deliver, let alone the monitoring of different portfolios.

I think Edvard Munch must have been thinking about advisory investment portfolios when he painted The Scream. These days, I don’t meet many advisers using this approach for the bulk of their clients.

What has come to pass is the centralised investment proposition (CIP), opined by the FCA in several papers over the years.

Most advisers have now created a process by which they recommend a ready-made portfolio from a proposition already researched and prepared, covering a range of risk outcomes. This simplifies matters considerably.

However, it does not remove the advisory element and it intensifies the burden and risk on the adviser, who now has nearly the whole of the firm’s client bank invested in one solution.

With tens or even hundreds of millions of pounds in the CIP, an adviser needs to ensure there is always someone on hand to oversee the proposition. CIP changes are still advisory and while it is more efficient than bespoke advisory, the administrative burden is significant for most firms.

This led to advisers resorting to DFMs to deliver the portfolios for their CIP. Phew, what a relief. It meant no more chasing up clients every time a change is made in the portfolio, and you can hold someone else to account for investment performance.

It is no surprise then to read that ‘outsourcing’ of this kind is now commonplace.

What we now see is a further evolution and recognition that an adviser was never the investment manager in the first place and he/she was always ‘outsourcing’ to an investment manager anyway.

If we take this approach, then the administrative difference between using a DFM and a single collective is very slim indeed. Both are efficient.

The single collective has the advantage of no gains arising to the client through trading within the fund, so for general investment accounts t his works well.

For those advisers familiar with ultra-high net-worths, you will know that using a single collective is one of the most common approaches to keep control of capital gains tax liability. If it is good enough for the wealthiest, then it is good enough for those further down the food chain.

The key issue for advisers is the confidence they have in recommending something as simple as one fund. That confidence will only come if the client perceives they are paying for a financial planning service, not an investment product.

Lawrence Cook is responsible for Sanlam UK’s distribution strategy to the UK intermediary market with a focus on the IFA community. He joined Sanlam in 2019, following the acquisition of Thesis Asset Management, and was a key member of the team that secured the sale. Cook was a board director at Thesis and led the private client business along with marketing and business development. Previously he managed Towry’s office in Bristol and held a number of senior posts at Standard Life, working as part of the distribution team.