As a financial advisor, have you ever mapped out your time in a given day, a given week? Do you know how much of it is spent actively growing your business, generating revenue? How much is spent on necessary--but uncompensated--tasks that ultimately don't add value?
For many small- and medium-sized advisors, those with between $50 and $100 million in assets under management, the DIY approach to tasks such as compliance, investment management, even marketing and operations isn't actually the bargain it appears to be at first glance.
Results of a 2015 study by the Financial Planning Association and Financial Advisor IQ revealed that over 40% of large brokerages outsource at least one back office function--and 97% planned to increase their level of outsourcing.
Among smaller firms and independent RIAs, roughly 30% outsourced all their back office functions, according to 2016 research by Northern Trust, and 60% outsourced at least some of their back office tasks.
The chief driver behind the decision to outsource for most RIAs? Personal satisfaction and happiness with their job. For advisors who consider one-on-one client interactions the most rewarding (both personally and financially) part of their jobs, outsourcing administrative and back office roles frees them up to do what they do best.
Nicole Newlin, an advisor coach, encourages her clients to take a hard look at the amount of time they're spending on back office tasks versus the time they spend "networking, taking creative steps with business development, spending time with clients and building relationships." Those who are mired in technical, utility, or administrative tasks tend to be less successful--and less satisfied--with their jobs than those who focus on the client experience and relationship-building.
Assuming an average billable rate of $200 per hour, an advisor could easily spend tens of thousands of dollars in man-hours per year on compliance, strategic planning, practice management, investment management, and marketing. In fact, the average independent advisor spends just 49% of his or her time on tasks that add value to the practice or build AUM.
Perhaps more importantly, however, smaller advisories lack broad and deep expertise in these areas, making them ultimately less efficient, less competitive, and less effective for their clients.
And at the small- and medium-sized level, revenue streams are not usually sufficient to hire in-house expertise, at least not at a level available to larger brokerages.
For an advisory with $50 million in AUM, the costs of outsourcing back office tasks are a fraction of the costs associated with handling them in-house--which may explain the phenomenal growth in turnkey asset management programs (TAMPs) like FolioDynamix and Envestnet. In fact, risk-alignment platform Riskalyze recently built its own TAMP to get a piece of the growing market.
According to a 2016 study by Tiburon Strategic Advisors, a financial industry consultancy in California, TAMPs have over $3 trillion in assets under management, up over 1000% since the turn of the century.
Envestnet claims to have crunched the numbers: Outsourcing the tasks that technology can support (rebalancing, tax efficient trading, etc.) generates 300 basis point per year.
And advisor clients are onboard with technology solutions, as well. A 2015 Northern Trust survey showed that 90% of investors approved of their advisors outsourcing tasks to technology. High net worth investors, the most desirable clients, understand that a significant chunk of their advisory package is tied up in utility services like populating and rebalancing the portfolio, services easily outsourced to a technology platform. What they're willing to pay for is the human service from their financial advisor.
Newlin says that she typically encounters three objections to the outsourcing decision: Actual costs, loss of control over the practice, and shopping for and evaluating vendors. And she counters each of them by asking the advisors to define their value proposition to their clients--which almost always comes down to providing a superior client experience.
When advisors realize that they can give the best value to their clients when they aren't bogged down with the back office details, the decision to outsource makes itself.
"If you want clients to see you as picking funds, lots of people do that. But if you free up your time to provide full service, to devote more time to clients and children of clients, that's how an entrepreneur thinks..."
"If you want clients to see you as picking funds, lots of people do that. But if you free up your time to provide full service, to devote more time to clients and children of clients, that's how an entrepreneur thinks," Newlin says. She encourages growth-oriented advisors to hand off those tasks that take their focus off networking, business development, and relationship-building--the activities that build AUM.
TAMPs aren't the only option on the outsourcing menu. For every back-office task, there's a third-party partner or technology solution that can be scaled for the small- and medium-sized advisory.
Here are key areas where outsourcing make may sense depending on the strengths and weaknesses of a particular practice:
Compliance
Advisors in the $50 million AUM range simply cannot afford to hire a compliance professional with the breadth of knowledge necessary to the job in-house.
Ryon Beyer, co-founder of Hemington Wealth Management, remembers putting in weeks of 17-hour days on compliance issues preparing for an SEC inspection. That painful experience drove his decision to outsource compliance to a third party. He now spends about an hour a week on compliance, freeing his time for value-added services for his clients.
Depending on the complexity of the solution and the needs of the advisory, compliance solutions can run anywhere from less than $12,000 per year for technology packages to $100,000 or more depending on the complexities in the firm's fee models and investment philosophies.
It's a cost Beyer is happy to pay, however, because he knows it would cost significantly more to have internal expertise that can keep up with the never-ending stream of rule changes handed down by regulators.
Investment Management
This is an area where many RIAs struggle, believing that clients may negatively perceive the decision to outsource portfolio management to a third-party firm or technology solution. This concern may be overblown, however.
A 2016 study by RIA in a Box of nearly 1,200 advisory firms revealed that, of the 18% of advisories that outsourced portfolio management, nearly 60% saw significant growth in AUM. Of the 82% who managed investments internally, fewer than half saw growth in AUM.
Additionally, a decade-long study of 8,000 RIAs by SEI Advisor Network showed that advisors who outsourced investment management generated over $1 million in additional revenue over 10 years than those who managed investments in-house. The study also showed that outsources spent 49% of their time prospecting and meeting with existing clients, compared to just 26% for those who managed investments in-house. The study also found that advisors who outsourced added 14 new clients and about $14.5 million annually to their AUM, compared to just 4 new clients and less than $7 million annually for in-house managers.
For advisories who base their value proposition on financial planning and strategic asset management, outsourcing investment management is a profitable decision.
Practice Management and Operations
Tasks such as sales and marketing planning, client service communications, business planning, valuation and succession planning all fall into this broad category. Small- to medium-sized advisories can leverage outsourcing solutions to improve their lead generation, develop a professional marketing presence, and strengthen overall enterprise value--in short, they now have access to tools that let them compete with larger wirehouses without investing in additional staff.
Kathleen Longo, CFP, left a large brokerage two years ago to found Flourish Wealth Management. She chose to outsource her wealth management, marketing, compliance, and back office tasks right from the start, seeing it as a way to deliver a high level of client service without building a large and costly in-house infrastructure similar to the one she left at the registered advisory firm.
She is able to give her clients the same professional-looking reports, educational materials, and other deliverables she had at her disposal at her old firm. It allowed her to compete for the most desirable clients and build her practice without devoting her time to non-growth activities.
Other advisors embrace technology solutions like Truelytics which give insight into performance, analytics, and industry benchmarks to strengthen performance and identify opportunities for growth with an eye toward business valuation.
From the client's perspective, firms who outsource back office tasks have a more professional, value-added presence. Advisors are able to offer a level of oversight and diversification previously reserved only for major brokerages--and they are able to spend their time on growth-oriented tasks that generate revenue and build AUM. Now might be a good time for RIAs to take a hard look at the tasks they really need to keep in-house and those that are better delegated to an outsourced partner.
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