FlexShares Finds Advisors More Likely to Consider Outsourcing Due to COVID-19

Northern Trust Asset Management’s FlexShares Exchange Traded Funds (ETFs) today released its sixth biennial study on financial advisors’ views and adoption of external investment management services. First conducted in 2010, this year’s survey reveals that while the overall percentage of advisors who outsource investment management is consistent over the past decade, the way that advisors leverage external services is changing.

The survey of more than 500 advisors found that the share of advisors using external managers today (41%) is virtually unchanged from 2010 (42%), however the pandemic has encouraged firms that do not currently outsource to reassess their approach. When firms that handle investment management in-house were asked whether their opinion of outsourcing has changed as a result of the pandemic, 15% of respondents said they planned to increase usage of outside managers and 85% said they plan to reconsider the use of external management. While the pandemic has not triggered a significant shift towards third-party investment outsourcing to date, it’s a growing consideration among advisory firms.

More accounts, but fewer activities

Advisors that currently work with an external investment manager are outsourcing a greater number of client accounts, but becoming more targeted in their use. Advisors are more likely to outsource some or all investment strategies for all their accounts, rather than just their largest clients. This all-account approach is the choice of 49% of those who outsource, up from 39% in 2018 and 33% in 2016. However, the overall percentage of client assets outsourced was unchanged from 2018 at 53%. This may reflect a smaller scope of activities employed across a greater number of clients.

There is also a meaningful uptick in the types of accounts being outsourced. In 2020, advisors outsourced 38% of complex portfolios vs. 15% in 2014; 22% of less complex portfolios from 2% in 2014; and 35% of portfolios based on tax considerations, up from 11% in 2014. This demonstrates a growing view that third-party investment management is suitable for portfolios of all sizes and complexities.

Despite using external managers for a greater number of accounts, advisors are becoming more selective in the activities they choose to outsource. The percentage who outsource all activities has consistently declined to 12% of respondents from 50% in 2012. Approximately two-thirds (66%) outsource portfolio management, with product selection and asset allocation also key areas of focus. Some 15% of advisors use external managers for product selection, up from 8% in 2018. When asked for the first time about usage of outside asset allocators, 32% of respondents said they outsource the function.