Is multi-manager the ultimate outsourcing solution?

Gary Potter, co-head of Thames River Capital, explains how outsourcing to a multi-manager can boost your business’ profitability

The Retail Distribution Review (RDR) has raised three key challenges – regulation, business efficiency and client service and expectations. As the deadline draws closer, RDR continues to dominate trade press headlines while debate rages over the key aspects of the RDR that affect IFAs and the timelines in which advisers have to meet the FSA’s requirements.

What complicates an already complex situation is a continued lack of clarity on some fundamental issues which means that many advisers are finding planning for a post-RDR environment increasingly difficult. Multi-manager funds are viewed by some as a key beneficiary of RDR and outsourcing could therefore offer the perfect solution where persistent confusion and delay reigns.

Currently, with commission set by product providers, the revenue earned is largely independent of the time spent advising each client. The commission earned on larger clients may therefore cross-subsidise any shortfall between the cost of time spent advising smaller clients and the income earned from them.

Once RDR comes into force, IFAs will negotiate directly with clients on the fee for providing advice and, to be profitable, that fee will need to reflect the real cost of advice provision. Wealthier clients with more complex needs may be able and willing to pay a higher fee, but will also expect a higher level of service in return.

Smaller clients may be less able and willing to pay, meaning advisers may need to find a lower cost and more efficient investment solution, in addition to an easy and less time consuming way to provide their follow up service.

Client segmentation

Over the years most advisers will probably build up a large client bank, with the likelihood that many of them may not contribute significantly to ongoing revenue. It therefore makes business sense to spend more time servicing the 20% of clients who bring in the bulk of the revenue and find a lower maintenance solution for the less profitable 80%.

Identifying which clients fall under similar groupings – commonly referred to as ‘client segmentation’ - will allow IFAs to more cost-effectively ‘industrialise’ their investment process, ultimately servicing and retaining all clients in a more profitable and efficient way. Segmentation should be carried out on criteria that experience shows are the key drivers of client behaviour, such as wealth or life stage.

Advisers are therefore progressively looking to put their smaller clients into an external, efficient, compliant form of advice that requires an affordable amount of oversight. This is where multi-manager can help.

Next, advisers should seek to tailor appropriate core investment solutions to each client segment. For example, higher net worth clients with more sophisticated financial planning needs may warrant bespoke fund selection, while another segment may need a core multi-manager fund with additional satellite holdings for more specialist needs.