Cerulli: Advisers increasingly outsourcing portfolio management

Investment advisers are increasingly outsourcing portfolio management and concentrating on building client relationships, according to a study by Cerulli Associates.

Outsourcing has three advantages, according to Cerulli, and the first is that it allows advisers to concentrate on building client relationships, which is especially important to those holding Certified Financial Planner designations. “They are trained to focus their client interaction on holistic financial planning instead of managing portfolios,” the report said.

Several CFPs echoed that sentiment. “I outsource investment management, and I firmly believe that CFPs should not manage client portfolios,” said Wade Brittingham, CFP, of Voya Financial Advisors Inc. “I want to spend my time with clients adding value to their lives with my financial planning expertise.”

Mr. Brittingham said it’s wise for a certified financial planner to keep with his skill set, and that it saves a huge amount of time that’s better spent meeting with clients.

“We have a fee-only, hourly/project based financial planning firm and choose not to manage client money,” said George Reilly, CFP, of Safe Harbor Financial Advisors. “In fact, one of our mission statement sentences is that, ‘We help clients manage their own money.’” Portfolio management is not something we want to do.”

Mr. Reilly uses First Ascent Asset Management (FAAM) of Denver for that portfolio management. Clients engage separately with FAAM, he said. “We are the client-facing advisers, and they are, in effect, our back office,” Mr. Reilly said.

The financial planning industry isn’t unanimous on the issue. According to Cerulli, 54% of CFPs outsource portfolio management, and 46% keep it in-house.

“We don’t outsource our management,” said Evan Beach, a financial planner for Campbell Wealth Management. “We have a CFA in-house that does nothing but watch the markets and our portfolios. He is analytical, disciplined and experienced — not always the same things you want in a planner.”

Leon LaBrecque of LJPR Financial Advisors, was more succinct: “We insource it. That is what we are paid to do.”

Financial planners aren’t the only advisers that lean towards outsourcing, the Cerulli report said. “Outsourcers can also be found among insurance B-D advisers, for whom investment management is often an afterthought to selling insurance. Independent B-Ds, who often are strapped for resources and time, show a preference for outsourcing. Almost one-third (31%) of outsourcers are in the IBD channel, whereas 25% of insourcers are IBD representatives.”

Independent registered investment advisers are the least likely to outsource portfolio management, according to Cerulli. About 18% show a preference for insourcing, versus 5% for outsourcing.

Implementation of the DOL fiduciary rule is the second reason outsourcing has become more popular, the Cerulli report said. “Home offices will require even the most sophisticated advisers to document each action to protect themselves from future inquiries. These documentation processes may become cumbersome and expensive to many advisers and the home offices who are working to increase due diligence.”

Finally, there’s the matter of investment returns. While many in the advisory business feel they can produce superior returns than a fully dedicated investment manager, the evidence doesn’t support it, the report said. “Cerulli research finds that advisers are quick to leave a falling equity market, but slow to enter when the market recovers. Since they miss a significant portion of a market upswing, their portfolios underperform over the long term.”