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Financial advisers increasing assets to external investment managers, says FlexShares survey

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FlexShares, the ETF unit of Northern Trust Asset Management, today released its fifth biennial study on financial advisers’ views of, and adoption of, external investment management services.

The survey reveals that financial advisers are increasingly seeking out ways to make their businesses more efficient through the use of third party services and other means, according to a survey by FlexShares, the ETF unit of Northern Trust.
 
First conducted in 2010, the survey measures advisers’ attitudes toward and adoption of third party investment managers and also tracks advisers who manage investments in-house. This year’s survey was completed by over 500 financial advisers from across various firm sizes and service models.
 
Findings show that a growing minority of advisers (43 per cent) currently employ third-party investment management solutions and devote an increasing amount of assets to external providers. Advisers reported outsourcing an average of 57 per cent of client assets under management (AUM) in 2018, up from 53 per cent in 2016. The key drivers behind the decision to outsource include “freeing up time in my practice” (61 per cent), “access to institutional quality due diligence/monitoring” (47 per cent) and “gaining access to a variety of investment product strategies” (43 per cent). Aadvisers particularly sought out external help for more niche strategies including alternative investments (65 per cent), emerging/frontier markets (43 per cent), ESG (17 per cent) and factor-based or ‘smart beta’ investments (14 per cent).
 
Advisers choosing to outsource either part of or all their investment strategies are increasingly satisfied with their decision. Satisfaction rates among advisers with external managers have consistently increased, up from 92 per cent in 2010 to 97 per cent today. Sixty two per cent of advisers have grown their client base as a result of external management, and 30 per cent have realised an increase in revenue.
 
“As advisers adapt to a growing demand for financial planning services and rising pressures on their bottom-line, they are increasingly looking to employ external investment management services and to focus on activities through which they can add the greatest value,” says Laura Gregg, Director of Client Development at FlexShares. “As they dedicate more client assets to outsourcing, advisers are able to benefit by spending more focused time with clients as well as concentrating on business development activities.”
 
Although overall satisfaction rates are up, using an external manager is not embraced by all advisers. Consistent with past years, many respondents are hesitant to use external investment managers because investment research remains a core part of their firm’s value proposition. However, the data shows that this attitude may be changing as the percentage of advisers that cite this reason has declined over time – to 32 per cent in 2018, down from 45 per cent in 2016 and 56 per cent in 2014. The desire to maintain flexibility was also cited as an important consideration by 15 per cent of non-outsourcers. The survey reveals that these advisers still want outside help. The desire for external marketing support (48 per cent) tops the list followed by compliance (29 per cent) and social media training (24 per cent).
 
A new part of this year’s survey was an examination of the rise of digital advice platforms and how advisers are implementing them within their practices. While a strong majority of advisers choose not to employ digital advice strategies, six per cent of respondents indicated that they currently utilise a digital advice platform and 12 per cent plan to incorporate one within the next year or two. Among the primary drivers for offering one are “attracting new clients,” “increasing the range of services offered on the firm’s platform with a lower fee,” “remaining competitive in the market,” and “reducing costs.”

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