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Why do advice firms work with external partners to help manage the investment proposition and what should they look for in a partner?

By Philip Leigh | 12 July 2023 | 5 minute read

Our recent research, in partnership with Charles Stanley, identified that the focus on fulfilling Consumer Duty requirements, by ensuring fair value and achieving good client outcomes mean that motivations for working with external partners are changing. But preconceptions of what it is like to partner externally, the perceived cost of doing so and impact on client relationships can often be a barrier to the tangible opportunities that working with an investment partner can afford. We think these preconceptions merit a second look.

The output of the research is a guide based on a series of in-depth conversations with advisers that addresses these pre-conceptions, whilst also outlining due diligence best practice in creating and reviewing efficient, trusting, long-term partnerships with external investment partners.

The guide also highlights the expectations that advisers have of providers in how they should fulfil their role and convey value within a partnership. The guide can be accessed here.

Below I outline some preconceptions associated with ‘outsourcing’, why they are important to acknowledge, and contrast these against adviser views on the benefits of working with an investment partner, to illustrate where there is value in doing so.

Acknowledging the pre-conceptions of working with an investment partner and why they matter

Advisers told us about a number of preconceptions linked to ‘outsourcing’ that in turn shape perceptions of a loss of control for the advice firm. Lack of control over costs the firm believes represents good value to the client (including undue DFM VAT charges), diminished oversight over investment choices, as well as scepticism around handling the investment process in an efficient and effective way were cited as key reasons not to consider working with an investment partner.

Re-considering these preconceptions is important because the notion of what it means ‘to outsource’ has moved on. For instance, whilst some advisers perceive lack of control as a result of partnering externally, for others we spoke to, they see it as a reason to do just that. These participants see that the role of the IFA isn’t to be the investment manager but to delegate this responsibility to DFMs. Advisers in favour of partnering with DFMs recognised the desire for advice firms to retain control of moving funds around, which can become inefficient and detract from overall time spent with clients. Some said in our interviews that this does not represent control, but the very opposite, often working against the ability of the firm to add value to the service they provide their clients. For these advisers, clear and transparent communication between DFM and the advice firm, where both parties work together to share information in agreed ways ensures that the feeling of control can still be achieved.

What does it deliver for the firm or for the client in terms of added value or efficiency savings, and when is it worth adding to the fees clients already pay to bring in a partner to deliver the investment proposition?

Our interviews highlighted both operational and emotional benefits, to both the advice firm and clients in working with investment partners.

Operational benefits which create greater efficiencies for the financial advice firm include, among others, the ability to minimise the costs of managing portfolios, without the regulatory burden associated with the process of adopting in-house discretionary permissions. The shift in the position of DFMs not to charge VAT on MPS further underlines the increased potential value in partnering with them (in contrast with one of the widely held preconceptions of outsourcing, outlined above)

In the research we observed that advisers were keen to highlight the benefit that external partnerships can help maintain focus on the client plan. They expressed that working with credible, specialist investment partners can ensure the suitability of recommendations and enable clients to have access to investments that will meet their planning needs. Crucially, working with specialist partners means clients investments can be managed by those with a deep knowledge of investment process, in turn helping to achieve desired outcomes as well as protect the on-going client relationship, by shouldering the responsibility of investment performance.

On a more emotional level, all advisers told us how their clients value the reassurance that receiving financial advice and financial planning gives them. Enabling the client to meet their life goals is key in shaping the sense of value in the relationship and ongoing trust in the IFA business. Afterall trust in working toward these goals is what clients come to their adviser for and value; not investment administration.

Working with an investment partner can strengthen the client relationship as more time can be dedicated to client interaction and in-depth understanding of their needs. It can imbue advisers with a greater sense of confidence in their understanding of the investment process and investment performance and provide the ability to make more assured recommendations to clients as a result. Ultimately this helps to convey the level of confidence and trust that clients seek.

We hope that our guide proves useful in demonstrating how to create meaningful partnerships across the financial advice distribution chain, how closer collaboration between firms can add value for financial advice firms and provide the ability to access products and services that can lead to greater outcomes for clients.

Financial advice professionals interested in contributing to future research studies please get in touch on enquiries@nextwealth.co.uk

Philip Leigh, Qualitative Researcher at NextWealth

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