CHICAGO–(BUSINESS WIRE)–FlexShares by Northern Trust Asset Management® Exchange Traded Funds today announced the results of its latest biennial study of financial advisers’ use of external investment management services. This year’s version of the survey, first conducted in 2010, found that the use of external investment managers in the advisory industry has continued to gain traction over the past two years. Companies already using outside managers increased their allocations, while many companies that had not previously outsourced decided to start doing so during the pandemic.
The survey of over 500 consultants found that companies using external managers are very satisfied with their experience and often choose to increase their level of outsourcing over time. In the last two years, almost all companies that already use external managers have either increased (50%) or kept constant (49%) their outsourcing activities. 95% of companies reported being “satisfied” or “very satisfied” with their outsourcing solutions, and a majority (53%) directly correlated their outsourcing efforts with generating more revenue.
RIAs report greater outsourcing growth
While a smaller proportion of Registered Investment Advisers (RIAs) choose to outsource compared to Independent Broker Dealers (IBDs), the RIA subset is beginning to rely on third party providers at a rapidly increasing rate. In 2022, 32% of RIAs are now outsourcing, compared to 27% in 2020. That number has remained largely unchanged for IBDs at around 50%.
RIAs also reported higher paging rates as a percentage of assets under management (AUM). On average, RIAs outsource about 50% of assets under management, while IBDs outsource 39%. This increased adoption may be a function of company size. Because RIAs tend to be smaller companies, many need more external support in light of recent market disruptions.
Within each advisory channel, there are also differences in how companies select outsourcing options. RIAs are more likely to outsource back-office operations than IBDs (25% vs. 15%). In contrast, IBDs invest more of their outsourcing efforts in investment manager research (38% vs. 22%) and due diligence/monitoring (27% vs. 17%).
Outsourcing increased amidst Covid-19
The 2020 iteration of this survey asked companies that carry out investment management in-house whether their views on outsourcing had changed as a result of the pandemic – 15% of respondents said they plan to increase the use of external managers and 85% would consider again. Two years later, a significant number of companies have demonstrably decided to start outsourcing their investment management.
In this year’s survey, about a third (34%) of advisors said their firm had outsourced investment management for the first time during the pandemic. These firms are likely to have turned to external managers to deal with the high turnover and instability of the era, even if they had not previously outsourced. Additionally, companies that were already outsourcing before Covid-19 knew they could rely on external services – almost a quarter (23%) said they had increased outsourcing during the pandemic.
“While the investment outsourcing trend had already gained momentum as advisors shifted to more holistic financial planning activities, outsourcing is also proving to be a source of stability in more turbulent market conditions,” said Laura Hanichak Gregg, Director of Practice Management and Advisor Research at FlexShares. “As the investment landscape has become increasingly volatile in recent years, many companies have turned to external resources for the first time or expanded their existing operations, perhaps to deal with recent disruptions.”
The future of outsourcing adoption
While the overall proportion of consultants who have chosen to outsource has remained very constant over time, attitudes towards external managers continue to change positively and could bode for further adoption in the future. Firms that don’t outsource today are becoming more receptive — the number of firms refusing to outsource investment management has steadily declined over the past five years.
When consultants were asked what would change their minds, affordability remained the most important factor. However, the focus on cost seemed to be giving way in favor of the quality of the options available. This year, the importance of “a broader range of solutions” was preferred by almost a quarter of respondents, compared to 17% in 2020.
About the FlexShares Race to Scalability survey
FlexShares partnered with us to conduct this year’s survey, the seventh in a series examining advisors’ views on external investment management Information Engage, which conducted the survey between January 10 and February 1, 2022 among consultants and closely related professionals. More than 550 responses are included in the final report. The sponsor was not identified in the survey.
To download a full summary of the results and for more information, visit www.flexshares.com/outsourcing.
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About Northern Trust Asset Management
Northern Trust Asset Management is a global investment manager that helps investors navigate a changing market environment so they can confidently achieve their long-term goals. With $1 trillion in investor wealth entrusted to us as of June 30, 2022, we understand that investments ultimately serve a greater purpose and believe that investors should be compensated for the risks they take – in all market environments and with any investment strategy . That’s why we combine solid capital markets research, expert portfolio construction and thorough risk management to create innovative and efficient solutions that deliver targeted investment outcomes. As committed contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect and transparency.
Northern Trust Asset Management consists of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, KK, NT Global Advisors, Inc., 50 South Capital Advisors, LLC , Belvedere Advisors LLC, Northern Trust Asset Management Australia Pty Ltd and investment staff of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, wealth management, wealth management and banking services to corporations, institutions, wealthy families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 23 US states and Washington, DC and 23 locations in Canada, Europe, the Middle East and Asia Pacific. As of June 30, 2022, Northern Trust had US$13.7 trillion in assets under custody and US$1.3 trillion in assets under management. For more than 130 years, Northern Trust has been recognized as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit us at northtrust.com. follow us on Twitter @NorthernTrust or Northern Trust Corporation on LinkedIn.
Northern Trust Corporation, Headquarters: 50 South La Salle Street, Chicago, Illinois 60603 USA, incorporated with limited liability in the USA For global legal and regulatory information go to https://www.northerntrust.com/terms-and-conditions .
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