It’s Easter and my healthy eating intentions are being compromised by the aroma of hot cross buns. Have you ever tried to make hot cross buns? They involve a lot of time and effort, which really doesn’t seem worth it when you can buy in really good ones that taste consistently just as good – if not better – than the home-produced versions.
The same is true for investment portfolios. Much is written about the cost of outsourcing investment solutions (this article from FTAdviser is a good example) yet the plus-points of taking this route are rarely explored in full.
If you are an adviser who wants to offer your clients access to investment portfolios that truly meet their individual needs then you have to weigh up the pros and cons of carrying out the investment process in-house against the costs of outsourcing. Both carry costs and outsourcing doesn’t necessarily mean increased costs overall.
Building investment expertise in the form of discretionary permissions in-house is expensive – £50,000 in regulatory capital for a start with well in excess of £250,000 per year in salaries, bonuses, compliance support, research, data services and other operational infrastructure.
Even for large firms where this cost is deemed manageable, it’s not always ideal to rely solely on the in-house team if you want clients to have access to investment solutions that meet their particular needs. There’s also the risk of shoe-horning if the portfolio options are kept narrow.
Outsourcing investment management can have multiple benefits: it frees up time to focus on the advice side of the client relationship, it opens up opportunities to see more clients because of the time saved, it can open up access to technology-led innovations that add value for clients (such as CGT allowance harvesting and trigger-based rebalancing) and improve communication about investment performance.
Whether advisers choose to pass on the cost direct to clients or absorb it into their existing fee is a matter of personal preference. Those who absorb it can find that the extra time they have to expand the number of clients they can see easily makes up for the added cost to their business. Those that pass on the cost directly can use the added value benefits of using a solution that exactly meets the individual client’s needs as justification.
Either way, the bottom line is managing investment solutions effectively for clients does come at a cost and choosing an in-house solution can be just like making your own hot cross buns – time-consuming and no guarantee of a first-class outcome.