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More RIAs Outsourcing Investment Management: Survey

Michael S. Fischer By Michael S. Fischer

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What You Need to Know

  • Ninety-five percent of firms surveyed said they were satisfied or very satisfied with their outsourced solutions.
  • The share of RIAs who outsource investment management grew since 2020; the share of BDs who did so remained constant.
  • While some advisors say cost concerns have kept them from outsourcing, that focus appears to be receding.

The financial advisory industry’s use of outside investment managers has continued to gain traction over the past two years, particularly among RIAs, according to results of a biennial survey released Wednesday by Northern Trust Asset Management’s FlexShares Exchange Traded Funds.

About equal numbers of firms that were already using external managers reported that they either increased their outsourcing activities or kept them consistent.

Ninety-five percent of firms surveyed said they were satisfied or very satisfied with their outsourced solutions. Fifty-three percent said they directly correlated their outsourcing activities with allowing them to generate more revenue.

The new survey is the seventh in a series examining advisor views on external investment management. It was fielded by Informa Engage in January, and received responses from some 550 advisors and closely related professionals.

RIAs Increase Outsourcing

A smaller proportion of RIAs than independent broker-dealers choose to outsource, but that is beginning to change, according to the survey. In 2022, 32% of RIAs said they outsourced, up from 27% two years ago. The figure for IBDs has remained largely unchanged at about 50%.

Moreover, RIAs reported higher levels of outsourcing as a percentage of assets under management. On average, they outsource about 50% of assets, while IBDs outsource 39%. 

FlexShares noted that RIAs’ increased adoption may be a function of business size. Because they tend to be smaller enterprises, many RIAs require greater external support amid recent market disruptions.

Within each advisor channel, differences also crop up in what the firms are choosing to outsource. RIAs are more likely than IBDs to outsource back-office operations, while IBDs put more of their outsourcing efforts into investment manager research and due diligence/monitoring.

The Pandemic Effect

In the 2020 iteration of this survey, pollsters asked participating firms that handled investment management in-house whether their opinion of outsourcing had changed as a result of the pandemic. 

Fifteen percent of respondents said they planned to increase their use of outside managers, and 85% said they would reconsider doing so. The 2022 survey found that a significant number of those firms have chosen to start outsourcing investment management.

In this year’s survey, 34% of advisors said their firm outsourced investment management for the first time during the pandemic. FlexShares noted that these firms likely turned to external managers to cope with the period’s high turnover and instability even if they had not outsourced before. 

Furthermore, 23% of advisory firms that were already outsourcing before the onset of the pandemic reported that they had increased outsourcing during the pandemic.

“While the trend toward investment outsourcing had already been gaining momentum as advisors shifted towards more holistic financial planning activities, outsourcing is also proving to be a source of stability in more turbulent market conditions,” Laura Hanichak Gregg, director of practice management and advisor research at FlexShares, said in a statement. 

“As the investment landscape has become increasingly volatile over the past few years, many firms have utilized external resources for the first time or expanded their existing activities, perhaps as a way to cope with recent disruptions.”

The Future of Outsourcing Adoption

While the overall share of advisors that choose to outsource has remained consistent over time, attitudes toward outside managers continue to become more favorable and may suggest further adoption in the future, according to FlexShares. 

It said firms that do not outsource today are increasingly open to doing so, and the number of those that rule out investment management outsourcing has consistently declined over the past five years.

When the survey asked advisors what would change their opinion about outsourcing, their top consideration was affordability. The focus on cost, however, appears to be receding in favor of the quality of options available. 

This year, nearly a quarter of advisors cited the importance of a “broader range of solutions” as their main consideration, up from 17% in the 2020 survey.

Michael S. Fischer

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