Outsourcing key services

For over ten years now, the Financial Advisors Brokerage (FAB) Group has looked outward for support services like IT or advertising, and even for some practices—like tax and legal services—more closely tied to their core business.

In each case, the impetus was the same: “We don’t have the expertise for those types of activities and would rather not get involved in hiring staff for them,” says Randall Reynolds, president of the Vancouver-based firm. And the approach continues to work as the group transitions into a managing general agency. In: Financial planning. Out: Legal and accounting services.

And the FAB Group isn’t alone in turning to third-party providers for elements of client service, or in taking outsourcing beyond far-back-office functions. Along with IT and record keeping, tax, financial planning and legal services have joined the stream of work headed to external partners; that is, to other advisors, lawyers and accountants further afield.

External partners represent expertise, convenience and valued industry connections. So are they paying off for advisors?

Savings and strategy

Outsourcing is usually synonymous with cost savings. The cost of staffing and building space are still issues, but post-recession, other drivers are prompting players in all industries to outsource, especially among larger institutions, which view outsourcing as a more tactical maneouver, according to a 2007 report from the Centre for Outsourcing Research and Education.

Among U.S.-based advisors, a recent Rydex survey found that almost a quarter of them—22%—offer their own services to other advisors. And at the top of the list of other outsourced functions: tax filing and bookkeeping, according to its 2010 Annual Advisor Benchmarking Survey.

On this side of the border, the volume of advisors using outside services likely isn’t as high, notes Eustan Matthews, principal at Matthews Financial Consulting, which provides planning services to advisors in Ontario and Alberta.

“There’s a small market right now,” he says. He estimates “Canada is about five years behind [U.S. advisors] currently.”

Smaller numbers, similar strategy

Smaller numbers, maybe, but advisors from firms of all sizes are following a similar strategy. From their perspective, it’s about providing a full range of services.

Offering clients a comprehensive plan is a huge draw, notes Jack Lumsden, a senior financial advisor at Assante Financial Management Ltd. in Burlington, Ontario. Although his firm provides in-house resources, like insurance and legal experts, advisors can also establish their own relationships with other providers for certain services.

Doing so just makes sense, he says.Lumsden doesn’t think any one advisor can be an expert in all areas—financial and tax planning, money management, insurance and legal services for power-of-attorney and estate planning. But he says “by outsourcing, we can do a full job for our clients.”

An advisor overseeing different elements of a client’s plan takes on what Scott Plaskett, senior financial planner and CEO at Ironshield Financial Planning, calls “a quarterback position.” At that point, “you need to recognize when to bring in other services,” he says.

In some cases, what goes out is based on specific needs. A client may need a service, like a trust, that isn’t available in-house, or an advisor may need more manpower during a temporary crunch period. In other cases, it’s part of a predetermined approach to service.

At FAB, the firm’s focus is financial planning, which “involves a commitment that can’t be effectively outsourced,” says Reynolds. So the firm recently hired a chartered accountant to keep some of the accounting work—such as financial-planning-related tax matters—in-house.

The value proposition

Rounding out services with outsourcing can add value. Giving different pieces of a financial strategy—whether tax or legal—to a specific provider ensures each element gets specialist care. Outside partnerships mean “best-in-class advice,” says Lumsden. “As an advisor, you put yourself in the place of the client, [ensuring] they have the highest opportunity of achieving their goals.”

In some cases, that know-how is technical. Matthews uses financial-planning software to prepare plans for his clients that some advisors are too busy to master or find too complicated.

Advisors, too, get best-in-class service themselves. Reynolds points to immediate turnaround on projects and the benefit of being in a client position himself—an advantage Plaskett echoes. “You can get a higher level of trust,” he says. “If you’re dealing with an owner, they have more skin in the game.”

Having another provider offering backup can also enhance advisor credibility.

Clients get a second opinion on matters, and having arm’s-length input “helps reduce the perceived conflict of interest advisors face,” Reynolds adds. “There’s an inherent conflict of interest when the person who’s recommending a financial solution generates a commission. The more independent the advice and strategy, the clearer the lines are drawn.” Practical partnerships Other benefits, such as time freed up to spend with clients, are more practical.

A recent U.S College for Financial Planning’s trends survey shows advisors spend over half their time—56%—in so-called client-facing activities like prospecting, meeting with current clients and addressing client service problems. And Matthews estimates handling four financial plans per month would free up roughly 20 hours for the average advisor. “That’s an extra ten clients they can meet with each month.”

Or, alternatively, ten extra hands on deck when needed.

“If [a firm] has someone on maternity leave, we can step in and do the work,” says Naomi Scrivener, principal and owner of Back Office Solutions, LLC, which offers advisors financial planning services. It’s actually possible for an advisor to build an entire business with outsourced services, she points out, noting just about everything, from reception to compliance, is available virtually.

The network of professionals can also create a back-and-forth referral system, bringing new clients into the fold.

With well-established partnerships, “the odds are good that you’re going to get referral business,” says Plaskett, but he warns it isn’t a given, stressing that relationships shouldn’t be pursued simply for the referrals. “If we hire a firm, that’s the right firm for our client. The most important relationship is the [one] with our clients.”

And key relationships with other providers take time and effort to solidify.

Markham, Ontario-based Worldsource Financial Management provides back-office support for its advisors, but they’re responsible for setting up local cross-support relationships with other advisors, and legal and tax teams.

“These types of relationships tend to have to be nurtured over time,” says Dave Peters, the company’s vice president of business development. “They’re extremely valuable and not easy to arrange. Accounting may not want to refer to you directly unless they know you.”

He points out they tend to work well in smaller-sized cities or towns, although that’s not always the case. When using outsourced services, Assante’s Lumsden will opt for proximity—that is, partners within a 45-minute radius—for certain services like taxes or a simple will or power-of-attorney that require face-to-face meetings with the client and the provider.

Insurance also tends to be local, he says. Other services, like financial planning, “can be sent anywhere.” Though the benefits add up, advisors should also be wary of relying too heavily on their partners, particularly when it comes to new business. Those partnerships, like any relationship, are fluid, notes Plaskett.

“They’re not a captive team member,” he cautions, noting the professional connection “doesn’t mean they have to refer business back to you.”

The key: Establishing strong provider relationships well before the client walks through the door. “Making sure we have those relationships in advance of the client is paramount to our success, “ he says. “Without them, a client could go to another third party that has a relationship with other financial planners, and therein lies the risk.” Risky business?

Many organizations cite other risks as a reason to avoid outsourcing. And those can be significant; spanning strategy, reputation, compliance and even operational risk, according to a 2005 Basel Committee on Banking Supervision report on outsourcing in the financial services industry.

For instance, an advisor using other service providers has to ensure they’ll provide the standard of service he or she requires, as well as comply with privacy and professional regulations, says Harold Geller, a lawyer at Ottawa law firm Doucet McBride, and an occasional consultant to Advocis’s Best Practices Committee. So, say, sharing client information with a tax lawyer who already represents a client’s wife or business partner might disclose information the client would rather keep to himself, he points out.

With confidentiality breached, an advisor would face “loss of stature, loss of the client and potentially doing harm to the client,” he says. “In addition, you may be breaching rules of your own professional requirements. When we’re hired to help out the client, we need the client’s permission to disclose information, such as through a letter of engagement, or you need the client’s specific written say-so.”

Matthews echoes those warnings. He ensures that his clients put his name in the letter of engagement for their own clients. “They should be letting clients know they’re working with a secondary source.” Firms should also take care not to farm out the services that add the most value to their business, research from Northern Trust Investments in the U.S. points out. That report focuses on investment management outsourcing, but could certainly apply to general advisor activities as well.

The Centre for Outsourcing Research and Education report backs up this advice, suggesting would-be outsourcers carefully define what’s central to their business and what would be better served by using third-party providers.

Another drawback to having various pieces of a client’s file handled in different places is the logistics of keeping track of everyone else’s progress and “making sure everyone’s goals line up,” says Lumsden. “That’s where the advisor comes in —to ensure everything makes sense.”

Risk and reward

Overall, does outsourcing make sense? And is the payoff worth the risks? Like most advisors, both Reynolds and Plaskett take advantage of external and internal supports. But ultimately, it’s a question of strategy, according to Reynolds.

“If it’s strategically appropriate to outsource, [after] recognizing the benefits and limitations, I would choose to outsource,” he says. “And likewise, if it seems to be strategically appropriate, as we decided to do with financial planning, we’d build a business plan around it.”

For Plaskett, outsourcing may start off as limitations—“even a GP can recognize when it’s time to bring in a neurologist,” he points out—but it’s ultimately about possibilities.

“Clients are happier, I’m happier, and clients are seeing that we’re truly a resource in more ways than [the ones] we’re working on together.

“Everybody wins.”