An article featuring the results of a survey that asked advisers about their attitudes to outsourced investment caught our eye recently.

Two thirds of those polled said it will be hard to keep investment management services in-house over the next two years but the article also flagged research which highlights how difficult it is for advisers to compare providers and select the most suitable option for clients.

The fact there were multiple reasons cited for why advisers are feeling the need to outsource shows that many are feeling the pressure. Whatever the reasons, advisers clearly have a dilemma: they can see the benefits of outsourcing but knowing who to choose can be a minefield.

Finding a firm to assist in sifting through the options seems a logical answer but this too requires a bit of research to ensure you are getting unbiased, independent advice. At first glance many seem to offer a similar service but, as ever, the devil is the detail.  It seems there are three levels of service:

  1. Providing data – a very useful service, but they aren’t helping you process the data against your needs
  2. Performing a Due Diligence check – equivalent to a compliance check on DFMs
  3. Running a selection process – giving an opinion on who offers a great investment proposition and is a good fit for your firm

Each of the three require different skill sets and not all the firms set up to offer assistance to advisers on the selection process are well equipped to provide all of them.  Building a data model is very different to understanding compliance and both are very different to being able to understand the minutia of a complex investment proposition.

Also, different firms have different business models:

  • Some firms charge the DFMs to be part of their database
  • Some firms charge the adviser firm for the service they provide
  • Some firms charge the DFMs and the advisers

One of the big issues that can arise with some of the above business models is the universe the provider is selecting from might not include your perfect match, as DFMs need to opt into that provider’s model.  At the last count we found north of 250 firms purporting to offer some sort of investment sourcing service to financial adviser firms.

Ultimately if you are minded to want to work with a DFM, or Discretionary Investment Manager (DIM) in the first place, then getting the right help from the start is essential. Given it is such an important business decision, you will probably want to make sure that any recommendation is:

  1. Performed by a firm that can draw on individuals with the relevant experience and qualifications
  2. Selected from the entire universe
  3. Tailored to your firm’s requirements

Whichever route you take, it’s worth remembering that the regulator will hold you responsible for the choice you make.  These service providers aren’t regulated and there is no recourse if everything goes wrong. Our advice is don’t just kick the tyres on this, get stuck in under the bonnet.