Converting to an outsourced provider can be time-consuming, expensive and potentially damaging. Cherry Reynard investigates what advisers can do to ensure the process goes as smoothly as possible.
Outsourcing is becoming increasingly important in building an RDR-ready advisory business. While advisers have historically outsourced compliance and technology functions, they now have to make a decision on whether they should outsource, for example, their platform provision or investment management.
The process of converting to an outsourced provider can be time-consuming and expensive and the costs of getting it wrong potentially damaging. What can advisers do to ensure everything goes as smoothly as possible?
More on outsourcing: Avoid the doghouse
Justin Urquhart Stewart of 7IM on why advisers might or might not outsource the investment element of their business ...
Before starting on the process of selecting an outsourcing partner, it is worth laying out the risks and processes that need to be eliminated from the business. When selecting an external investment manager, for example, advisers can outsource the day-to-day research and fund selection functions to a multi-manager and they can also outsource their asset allocation if they use a discretionary fund manager.
What they cannot do, however, is outsource the responsibility for the risk assessment of clients or ensuring suitability of investments. Creating realistic expectations at the outset may prevent disappointment further down the line. As part of the same process, it is also useful to have an idea of cost – is there a cut-off point at which it becomes uneconomical to outsource?
Having set out their expectations, advisers will be in a position to review the available options. Increasingly there are tools to help advisers scan the market, with groups such as Platforum and DeFaqto offering interactive selection processes.
That said, advisers can also pick up ideas from looking at the actions of similar advisers, from reading the trade press and from soliciting recommendations at trade fairs and conferences. Help may be available from networks too and, ultimately, advisers should be able to piece together a good shortlist of suitable providers to approach.
Those shortlisted providers should be examined for financial strength (reports and accounts for all limited companies are available from Companies House), cost and reputation (LinkedIn and other social media forums are increasingly useful means of assessing a company’s reputation). Of course, part of the process will simply be ‘feel’ – whether the company seems trustworthy and responsive, with friendly personnel who understand individual financial advisory businesses.
The hardest part of building an outsourced relationship is often the transition process – loading clients onto a new system or shifting client portfolios. As such, it is worth knowing whether the provider will shoulder any of this burden.
Talking to advisers who have been through a similar process with the same provider will also provide valuable insight. Any provider worth his salt should be willing to provide references of previous projects. It is also important to assign responsibility for the transition to individual personnel so that there can be no cumulative ‘passing the buck’.
Outsourcing may ultimately make an adviser’s business run more smoothly and efficiently, but it takes time and effort to arrive at that stage. Taking extra care in the early stages should ensure that advisers will get the most out of their outsourcing relationships over the longer term. Once an outsourcing provider has been selected, it is tempting to believe the hard work has been done but the most successful partnerships have structures in place to ensure the relationship continues to be profitable and efficient for both parties. With this in mind, what can advisers do to ensure their outsourcing relationships work to their full effect?
Appointing dedicated personnel on both sides – whose responsibility it is to manage the relationship, share problems and give feedback – should ensure the process runs smoothly. Having clear points of contact prevents confusion and helps build personal relationships.
From the outset, it is important each side knows what is expected of them. This includes what information they need to provide to their outsourcing partner and, in turn, what information they expect to receive back. Advisers should also ensure they know exactly what is included in the cost of services and what will be extra. Many outsourcing relationships fall apart because the outsourcing provider has over promised in the pitch process or the adviser group has not understood the nature of the services provided. All of this should be set out in writing and agreed by both parties.
This is likely to be bound up with a client’s objectives. The outsourcing partner and adviser need to set performance criteria in order to provide a framework for discussion and action if the relationship starts to go wrong, or if one side believes they are not obtaining what they need.
Although day-to-day contact should be handled by designated personnel, there should be regular reviews with senior management from both groups. This provides a forum to air any problems, iron out any grievances and discuss any next steps. It goes without saying that honesty is a valuable commodity in such discussions and addressing problems early can save considerable difficulties later on. The failure of an outsourcing relationship is often likened to a divorce – emotionally exhausting, expensive and time-consuming – and it is therefore better to seek counselling early.
Ultimately, successful outsourcing is all about building and maintaining trust. Both sides need to feel listened to and understood and believe that their needs are being met. This means being open and honest – but also setting out expectations clearly and addressing problems early. Outsourcing can work wonders for business efficiency, but only if it is managed well.