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Investment outsourcing - unlocking the market potential

November 2016

It feels like the adviser community is facing challenges from all directions; regulatory scrutiny, changing legislation, more complex demands from a growing number of clients. The list goes on.

Here we consider some of the issues faced by advisers. We also highlight how building a centralised retirement proposition and outsourcing clients' day-to-day investment management could alleviate some of these strains.

Under pressure from greater freedoms

There is no doubt that the financial advice landscape has undergone huge transformation in recent years. One of the biggest game-changers was the introduction of the pensions freedoms in 2015, which handed clients greater financial flexibility in their retirement. At the same time, they opened the door to huge opportunities and challenges for advisers.

Firstly, demand for advice is growing exponentially. Before the pension reforms, most clients would have bought an annuity at retirement. Now, many clients are likely to stay invested and use the freedoms to take a flexible income. This means more and more clients coming back each year to revisit their retirement options and requiring on-going dialogue over the long term. This is a great opportunity for advisers who are geared up to cope with such volume. However, those that lack scalable processes could struggle to maintain all their investment functions in the face of more client meetings and mounting administrative demands.

Secondly, retirement advice is increasingly complex. With more clients choosing to go into drawdown, making judicious investment choices throughout the retirement journey is critical; not just with their pension pot but with the full suite of retirement investments at their disposal. At the same time, clients in drawdown bring additional technical investment challenges including managing risk and volatility, implementing a withdrawal policy, and ensuring the sustainability of income.

Tax and estate planning add another layer of complexity. Advisers will probably need to utilise a wider range of tax wrappers than before to satisfy clients' income needs in retirement. And with pensions now at the heart of estate planning, advisers also have greater responsibility and accountability to the next generations of clients.

But while the landscape may have changed, the role of the adviser has not. So how can they remain focused on helping clients achieve their financial goals and a comfortable retirement, while facing such significant challenges?

Building a Centralised Retirement Proposition

A solution to these issues may be for advisers to develop a Centralised Retirement Proposition (CRP) and, as part of that, to outsource their investment management responsibilities to a discretionary fund manager.

Advisers may find that the propositions they used successfully as part of a Centralised Investment Proposition (CIP) in the accumulation phase, are unsuitable for the challenges clients face in retirement. Therefore, developing a CRP to sit alongside their CIP could allow for a similarly standardised approach. It could also help advisers deliver retirement planning within a clear and manageable framework. Segmenting groups of clients on similar retirement journeys can reduce the time spent on administration and make it easier for advisers to ensure their chosen investment outsourcing providers are delivering the right outcomes for clients.

Three pillars of a successful CRP

  • Investment policy
    A clear investment policy for 'in retirement' clients, is crucial to minimising risk. The nature of investment risk in retirement and when money is being withdrawn is very different to when wealth is accumulating and being invested for growth.
  • Withdrawal policy
    If a client chooses the drawdown route, there is a real risk of them outliving their retirement savings. A withdrawal policy sets realistic client expectations at the outset about how much income their portfolio may provide. Having a clear plan should reduce the chance of clients being unnerved when markets are volatile.
  • Tax policy
    A tax policy framework helps advisers establish repeatable processes which aim to provide a tax efficient income for clients in retirement, and possibly their successors.

Outsourcing investment responsibilities.

In the new retirement landscape, those advisers maintaining in-house investment management could find themselves struggling to cope with the increased burden of administration and client meetings. That's on top of their rigorous investment research, constant portfolio rebalancing and not to mention the additional complexities of investing in the drawdown phase.

As such, many advisers are recognising the benefits of outsourcing these responsibilities to a specialist investment manager. This could feel like a big step-change for traditional advisers and it may meet with some reluctance. It is, after all, natural to fear relinquishing control. However, outsourcing can actually help empower advisers and galvanise their businesses.

Reasons to outsource

  • Cost efficiency
    Keeping investment management in-house costs money. Using the expertise of a discretionary manager, advisers can outsource the work involved in research and portfolio construction, and redirect resources towards activities that generate more revenue and client loyalty.
  • Mitigate risks
    Outsourcing the responsibility for investment decisions to an experienced discretionary fund manager can de-risk an adviser's business. What's more, when investing in drawdown, advisers may find themselves exposed to additional risks they may not have considered, such as sequencing of returns and portfolio drift.
  • Time better spent
    Freeing up valuable hours by outsourcing investment management means advisers can refocus their attention on financial planning and client relationships –strengthening their connections with existing clients and developing prospects.

A powerful partnership – finding the perfect match

Due diligence when selecting a suitable discretionary investment manager for a CRP is crucial – after all, advisers may not be able to turn to the same providers they used for accumulation solutions.

Advisers should ensure they do their homework and ask the right questions specifically in relation to investing in retirement. For example, can the investment manager offer an investment approach that dampens market volatility and the effects of reverse pound cost averaging? Equally, can they provide solutions that avoid short-term losses while still generating sufficient growth?

Advisers working in partnership with a skilled discretionary manager can be a powerful combination for a client; providing expert planning and relationship management, alongside specialist investment expertise.

Segment, centralise and conquer!

Pressures are growing but so are the opportunities and there are steps that advisers can take to strengthen their business and deliver retirement planning in a clear framework. With more than nine million baby boomers due to retire in the next 10 years, those advisers with scalable and repeatable processes will be the best placed to benefit. Building a CRP and outsourcing investment management are just some of the ways advisers can take back control and future-proof their business.

At Aberdeen Standard Capital, we can help advisers with their outsourcing requirements. To find out more, email us at asc@aberdeenstandard.com


Investment involves risk. - The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.