Justin Urquhart Stewart, a director and co-founder of Seven Investment Management, looks at some of the reasons why advisers may or may not consider outsourcing the investment element of their business
The art of great business is to do what you are great at. This may seems stunningly obvious but, in an industry such as financial services, all too often companies have grown up with key personnel having to control every aspect of their business’s operations.
From marketing, operations, compliance, selling and of course advising, the range for a small business seems to be legion. Then – as if that was not enough – they were expected to be investment experts across all asset classes around the globe. Surely this is the business design from hell?
The logical reality, of course, is that all entrepreneurs focus on their own dynamic skills in whatever field but then bring in the complementary expertise as required. So if professional advisers had the opportunity to start afresh with a clean sheet of paper, they would probably structure a business bringing in all the talents as necessary and not being forced to bear them all themselves.
“All entrepreneurs focus on their own dynamic skills in whatever field but then bring in the complementary expertise as required.”
Some of these decisions are relatively straightforward, such as compliance and accounting, but others can be more controversial and this has certainly been the case with investment. This is a subject where we can all have a view, and I am sure many of us have been bored listening to others telling us their great successes – and strangely omitting the investment catastrophes.
However, over the years, the advisory industry was lured by siren calls – usually of providers and insurance companies – into apparently simplistic structures of stochastic (or was it sarcastic?) modelling where a set model devised by some very eminent person just had to be populated by a range of provided funds and, before you knew it, you had apparently become an expert investment manager.
This to me was a patronising con by the industry, which merely provided access for the innocent to a dangerous chemistry set that could easily provide a toxic and lethal cocktail for both clients’ assets and perfectly good advisory businesses.
Institutional investment, as has been proven over the years, is not just a matter of picking a few funds or stocks but, rather, a continuous disciplined process and structure designed to manage risk and volatility while all along trying to improve levels of predictability – even in some of the most uncertain markets.
Thus, through a process of investment into a broad range of global asset classes – and behind that a rigorous ongoing asset allocation process – a proper investment structure can be shown to have a greater level of stability and reliability than the simplistic structures mentioned earlier.
The problem though is that such a process is not just time-consuming, it is a full time role for an expert team to monitor and evaluate the changing nature of the economic and investment world with which we are landed. Thus it has become almost inevitable advisers and planners have considered outsourcing some or even all of their investnent function. This in no way should detract from their service to their clients, and in fact may well enhance it by being able to bring institutional cost savings as well as specialist knowledge that otherwise would have not been available.
Obviously there is no one single perfect route and each practice will have its own business model and inherent skills, but these days advisers can access a range of investment support according to their own needs and their clients’ requirements. It may be both good and bad news they have never had so much choice – but that is at least a significant improvement. Either way, a blend of in-house or out-of-house can be acceptable but, whatever you do, please avoid the investment dog-house.