Should advisors outsource asset management? Vendors weigh in

Financial advisors deciding whether to outsource asset management capabilities or build it in-house do not have to view it as giving up all or nothing, said wealth management and tech providers during this week's Future Proof conference. 

"Outsourcing can often feel like a bad word, depending on your viewpoint," said Stephen Kaplan, head of customized managed account solutions at J.P. Morgan Asset Management. "When we think of outsourcing, we're really thinking of partnership to help bring scale and efficiency to your practices." 

Kaplan was speaking during a panel titled, "To build or outsource: The future of investment delivery" during Future Proof in Huntington Beach, California. He joined panelists Marlena Lee,  global head of investment solutions at Dimensional Fund Advisors, and Dana D'Auria, co-chief investment officer and group president of Envestnet. 

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While the panel makeup was ripe for pitching their services to advisors, the panelists instead focused on the challenges facing the industry that have made an advisor's job more difficult to manage — partly thanks to emerging technology — like growing asset classes such as alternatives and ETFs, and changes in tax laws. 

"The job's gotten a lot harder, right? Like all your clients, because of tech, they're getting real-time information. And they're asking you questions about things they probably didn't ask you about 10, 15 years ago," Kaplan said. "Model portfolios used to be mutual funds only. Then it was maybe I'll sprinkle in some ETFs, and now. … How do we build portfolios that have ETFs, mutual funds, separately managed accounts and ultimately, private alternatives."

A Cerulli survey released Aug. 29 found that 79% of asset managers said they made substantial changes to their coverage strategy during the last five years. One of the top reasons for that change, at 33%, was because of the distribution of a new product line such as alternatives. 

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There's "even more of a need to think about scaling because your jobs are getting harder; 100% your jobs are getting harder. It's not a linear life path" for the client or advisor, D'Auria said. "Outsource what you can and automate what you can so that you can spend the time and the focus on those moments when you need to."

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Panelists cautioned advisors to be methodical in terms of determining whether to outsource asset management capabilities and who to pick as a tech vendor. Meaning, evaluate where time is better spent based on each firm's "investment philosophy." 

"I would absolutely focus on what is my investment philosophy and then finding a solution that matches it," Lee said. "Then [it's] figuring out how to dedicate the advisor's time and align it with where you think you can add the most value: What are the things that your clients actually want to hear from you about?" 

A recent investor survey by Janus Henderson found that investors are rearranging their investment portfolios with more than 30% planning to shift assets out of equities in the next 12 months.

Kaplan said that advisors also need to be thinking about how they want to represent themselves. 

"Do you want to do everything on your own, or do you want to partner with a number of firms or a series of firms to do your investments or to build your portfolios?" he asked. "It is an important question from a value proposition perspective."

Lee also cautioned that there is a cost "trade-off" for advisors working with a vendor or tech firm. 

"There's always costs to incorporate it into the business, making sure that you're monitoring it and that you're getting what you need out of it," Lee said. "Think about that short-term cost versus long-run efficiencies that it gives to you. That's always the trade-off with any adoption of any technology."