Consumer Duty is Driving a Return to Outsourced Investment Management

Written by Tom Hind

Since its announcement in July 2022, Consumer Duty has sparked intense discussions and has been hailed as one of the most significant transformations in Retail Financial Services Regulations by UKFinance.org. As I engage with IFAs, it’s clear that even after a month since its integration, Consumer Duty remains a prominent topic of conversation.

One crucial aspect of the Consumer Duty is the distinction between ‘Manufacturers’ and ‘Distributers’ for firms involved in creating portfolios and managing client capital versus those solely recommending or advising on products. This classification provides firms with a clear understanding of their regulatory obligations going forward. However, for firms engaged in a combination of activities, such as advisory practices with an in-house investment proposition, they must adhere to both sets of requirements.

With the increased regulatory demands placed on these firms, such as the need for fair-value and target market assessments, the expenses associated with running in-house models are on the rise. The additional time spent on compliance for these models, without passing the cost onto clients, is putting pressure on profit margins. So, what is the solution to this predicament?

There are three distinct approaches that have emerged in the market:

1. Do nothing – some advisers are electing to keep things as they are. They like the control over the investment proposition and are happy to find the time or bring in extra resources to manage the portfolios effectively, as well as maintain the client engagement they feel is suitable for their clients.

2. Co-Manufacturer Approach – a hybrid approach is to act as a co-manufacturer where a partnership is forged with an external DFM if the advice firm still wants control over the parameters of the portfolio but delegate the day-to-day operations.

3. Distributer/Outsourcing Approach – a final approach is to completely outsource the proposition and either work with a specific DFM or to produce a panel of firms to work with to add diversification of managers to the investment proposition.

Opting for inaction has been a rarely chosen path from the feedback I have had. As profit margins in-house solutions tighten, financial advisors are finding themselves compelled to reevaluate their offerings to clients, with the primary focus being on determining whether the Co-Manufacturer approach or the Distributor approach would be more advantageous.

There are definite advantages to fully outsourcing and transitioning from producing in-house models to exclusively acting as a distributor. However, there may be some confusion regarding the definitions and concerns about future legislative changes that have prompted certain firms to completely relinquish their investment permissions. The downside of this approach is the lack of control over investment decisions, but it does come with the added benefit of being able to attribute poor performance to a third-party entity.

The Co-Manufacturer approach has emerged as the preferred choice among financial advisors due to their dedication to offering clients a comprehensive proposition that combines financial planning and investment management. This commitment has proven to be highly attractive to clients. On the other hand, smaller firms face a significant challenge in finding an Investment Manager who is willing to provide a tailor-made solution without extortionate prices.

Maintaining input into the investment proposition but limiting the regulatory requirements around reporting means more time can be spent focusing on clients and helping them achieve their financial objectives. The conversation for advice firms is focused on ‘what is the cost of us maintaining our discretionary permissions?’

If this is something you are grappling with then please do reach out, we would love to have a chat.