Insourcer or outsourcer: Which type of adviser are you?

Financial advisers taking the investment selection process upon themselves – known as insourcers – are on the rise, underpinned by a variety of factors.

Investment Trends’ 2024 Adviser Product and Marketing Needs Report, which surveyed over 1,700 advisers, highlighted a notable trend occurring in the advice industry.

Insourcers, who fully select investments themselves, are the largest group of advisers at 35 per cent and have an average funds under management (FUM) of $69.6 million. This segment has slightly grown from 32 per cent last year, the report found.

“The rise of ‘insourcers’ – advisers who view product selection as essential to their client value proposition. This group has grown significantly over the past year, with many managing larger funds under advice,” it noted.

The report identified four key adviser segments with differing degrees of involvement in the investment product selection process for client portfolios: insourcers, high modifiers, medium modifiers, and outsourcers.

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High modifiers, who have a high involvement in the investment selection, account for 29 per cent of advisers and manage $75.7 million in average FUM. Medium modifiers have a moderate involvement and comprise 21 per cent with an average FUM of $61.3 million.

On the final end of the spectrum, outsourcers have minimal to no involvement in the investment selection process and instead rely on asset managers for stockpicking. Outsourcers make up just 16 per cent with $60.2 million in average FUM.

Source: Investment Trends, July 2024

Speaking with Money Management, Irene Guiamatsia, head of research at Investment Trends, observed the rising number of advisers taking the insourcing approach. Many of these are advisers who have set up their own boutiques.

“What that means is a growing proportion of advisers are pitching themselves as stockpickers and experts that can choose products for you, as well as the other services they provide,” she explained.

Guiamatsia identified several driving factors as to why there is an upward trend in the number of advisers adding investment selection to their client value proposition.

“A couple of things are happening. Firstly, advisers have repriced their services and there has been a steep increase in the amount they are charging clients. So now they need to provide additional value back to the client.”

The median adviser fee has risen by nearly 60 per cent over the past five years, up from $2,510 in 2018 to $3,960 in 2023, Adviser Ratings’ research indicates, meaning it has become imperative for advisers to effectively exhibit the value of their service offering to clients.

Secondly, the high-net-worth (HNW) clients that many advisers are primarily targeting have more sophisticated and personalised needs.

The head of research continued: “When advisers go out to acquire new clients, they are very specific on the type of client they want to service, and they tend to be HNW. These clients want access to as broad a product range as possible, meaning that their adviser needs to be skilled in catering to their sophisticated needs.

“If we add those two components, we can see that the value proposition needs to be bolstered, plus HNW individuals will want diversity and exclusivity with access to certain investments. Those things are significant contributors to the trend that we are seeing in the type of insourcing advisers that are emerging more.”

However, the rise of insourcing does not mean outsourcing lacks its own benefits, Guiamatsia said, with many of these outsourcers opting to use managed accounts.

“Being an outsourcer isn’t a deficit in any way. It has its range of benefits, as it allows the advisers to go back to square one and focus on the value of financial planning. Their value is not just assigned to the numbers and the portfolio,” she remarked.