The wealth management landscape in 2023 looks very different than it did just a few years ago. A confluence of factors has helped shaped the new ecosystem for financial advisors:
- Investor demand for personalized experiences continues to grow
- Investments that were once limited to institutional investors are now available to mainstream investors
- Technology has made it possible to access more data and information than ever
To better serve clients, modern financial advisors must find ways to evolve their business to maximize those ideas — to find strategic methods of unlocking new opportunities and delivering superior experiences to clients.
Outsourcing investment management functions, such as due diligence, is one of the ways advisors can do that. Unless a firm is very large and has dedicated resources, manager research and due diligence can be a daunting, time-intensive function. By leveraging a third-party provider, advisors can find benefits that go well beyond freeing up their time.
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Expanded Investment Universe
A third-party due diligence partner can give advisors an expanded range of investment options for client portfolios. Experienced providers have built vast networks and can access a wide array of money managers, including those with specialized strategies, institutional investments, or access to niche markets. Advisors with access to more strategies can build more diversified portfolios, manage risk, and create more personalized experiences for clients.
Better Data
The volume of accessible relevant information available is enormous and ever-growing. Advisors may not have access to cutting-edge tech and tools to enable them to find and analyze the trusted data they need to make decisions. A third-party provider can help advisors to distill the data from multiple sources and hone in on the insights they need.
Specialized Expertise
Most advisors, unless they outsource investment management services, handle most of the aspects of their clients’ investment portfolios, covering everything from research and manager selection to portfolio construction and ongoing management. Outsourcing due diligence to an experienced third-party specialist enables advisors to gain access to their specialized knowledge and experience when it comes to evaluating managers. Often, outsourcing providers have specialized teams of experts that maintain deep insights into the complexities of the investment landscape, which enables them to identify potential risks and opportunities that an advisor might miss. That means advisors can deliver a potentially higher quality of investment choices, and ultimately better client experiences.
Risk Management
By outsourcing manager research and due diligence to a trusted outsourcing provider, advisors can confidently know that the risk guidelines and compliance parameters they want to maintain are being followed. Comprehensive due diligence by external experts incorporates rigorous risk assessment and compliance checks, which helps to protect advisors from regulatory risks as well as client assets. As part of that process, third-party providers maintain strict documentation of information.
Scalability
As advisory firms grow and face changing client demands, market conditions, and investment trends, outsourcing due diligence provides the scalability needed to adapt to evolving client needs. Onboarding new money managers, exploring new strategies, or discontinuing existing partnerships efficiently gives advisors the ability to pivot and capitalize on emerging opportunities for their clients.
Cost-Effectiveness
Advisors bringing new clients in will reach an inflection point where they will need to hire additional resources in order to optimally serve those clients. The cost of finding, hiring, training, and managing new in-house experts to handle investment management duties like manager due diligence is, in most cases, more than the cost of outsourcing with a third-party provider. One source indicates that more than half of the advisors surveyed who currently outsource investment management report their operating costs have declined since they began outsourcing, with 40% seeing declines in costs of 5% or more.¹
Time Efficiency
Conducting comprehensive due diligence on potential money managers demands considerable time and resources. Outsourcing this critical function enables advisors to concentrate on both existing clients — delivering personalized planning, nurturing relationships, and addressing their needs — as well as business-building activities, such as prospecting, education, and business planning. Outsourcing due diligence responsibilities to a trusted outsourcing partner helps advisors to streamline their operations, reduce administrative burdens, and focus on activities that directly impact client outcomes.
The argument can be made that advisors spend “too much time” on investment management or “not really that much time” on investment management. Kitces research shows that only half (50%) of the typical advisor’s time is actually spent on client-related activities.² The question remains — how much is the right amount of time to properly serve clients? And in either scenario, wouldn’t clients be better served with a team of dedicated, experienced specialists who spend all day every day doing research and manager due diligence?
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