Fund managers, who are you talking to?

Fund managers who are targeting marketing materials and other communications at financial advisers may be surprised by just how many of them are outsourcing investment decisions.

The intermediary sector is an obvious priority focus for fund marketing efforts. Independent financial advisers need support as they make asset allocation decisions and fund choices on behalf of clients. They also need high-quality reporting that enables them to stay on top of performance monitoring – and to provide meaningful feedback to the investors they represent.

That’s the theory. In practice however, many financial advisers may not be quite the audience envisaged by fund managers. In fact, increasing numbers are choosing to outsource investment decision making to discretionary wealth managers – or panels of such firms – rather than managing clients’ money for themselves.

This is a relatively modern phenomenon. In 2010, a survey conducted by the research company Defaqto found just 19% of financial advisers were operating this way. Two years later, however, this figure had risen to 43%. And research published at the end of last year found almost nine in 10 advisers are now outsourcers, with 87% having made the leap.

The primary explanation for this trend is straightforward. The Retail Distribution Review (RDR) reforms that came into force in January 2013 put new pressures on advisers, with regulators now scrutinising their investment expertise and practices more closely than ever before. The compliance burden has moved the dial for many advisers – it no longer makes sense for them to manage clients’ investment strategies in-house, particularly since there is fierce competition in the wealth management sector for this business.

This is not to suggest regulation is the only driver of outsourcing; other factors are at play too. For example, while financial advisers must manage a broad range of financial planning responsibilities, wealth managers are focused entirely on asset allocation and investment management; as a result, such firms are able to concentrate all their resources on investment management, including investment in new technologies.
It’s also likely that discretionary fund managers will offer access to a broader range of asset classes, including alternatives such as structured products, hedge funds and private equity. In addition, their reporting tools may be superior, taking in technologies and processes developed with an institutional investor audience in mind.

Some financial advisers also argue that their employment of discretionary wealth managers enables them to exercise their independence effectively, holding firms to account on behalf of clients, acting as gatekeepers to assess performance against agreed benchmarks and even replacing them where performance disappoints. By contrast, advisers whose investment decisions are all made in-house might be accused of marking their own homework.

Naturally, different advisers will have different motivations for the decisions they make about investment outsourcing. But it’s important that fund managers appreciate these trends and nuances as they think about how to market to intermediaries.

At the crudest level, there’s not much point in allocating resources to marketing efforts that are designed to win market share from advisers if the intermediaries in question aren’t the ones making the decisions about where to place clients’ business. Equally, fund managers that place undue emphasis on the financial adviser segment may be mis-allocating marketing resources that would be better concentrated on discretionary wealth managers.

More subtly, it may make sense to refocus communications with many advisers. For example, outsourcing frees up an adviser’s time for core financial planning competencies – from more efficient tax-planning to developing flexible strategies that evolve with clients’ needs – so these may be the areas where messaging needs to be strongest.

Don’t assume either that advisers will be content with less fulsome performance reporting, or that they’ll get everything they need from their wealth managers. Many intermediaries will rely on such reporting to prepare their own reports to clients – and to make crucial judgements about the performance of the wealth managers employed. They may want sophisticated reporting that includes detailed risk management data, for example.

It will also be increasingly important to manage the relationship with the adviser in the context of its dealings with discretionary wealth managers. Understanding how the reporting line works will be crucial if fund managers are to discharge their responsibilities as required.

In other words, the trend towards investment outsourcing in the intermediary sector requires fund managers to rethink their marketing efforts. Advisers and their clients are now consuming fund managers’ products and services in a different way; it is imperative to fine-tune the marketing strategy to reflect that shift.