Inflation, world events and the case for outsourcing

2 min read 7 Mar 22

Does an inflationary world and other macro challenges, strengthen the argument for advisers outsourcing the investment element of their proposition? 

Energy shortages, war in Eastern Europe and inflation heading towards 6%. It’s a confluence of events that would rattle any investor. And for advisers seeking to keep all of their clients’ investment strategies on track, dealing with so many massive macro tremors can be challenging.

Value of advice

Of course, difficult times are also when advisers come into their own. Being on hand to reassure clients. Giving impartial opinion on what fast-moving global events may mean for their portfolio and financial strategy. Exploring what precautionary action (if any) should be taken. All these actions can vividly remind end-clients of the value of partnering with a seasoned advice professional.

But the current environment may also be leading advisers to question if they should be partnering with a professional themselves – especially when it comes to client portfolio management

DFM growth

The growth in, and the reasons for, using discretionary fund managers (DFMs) to outsource portfolio management have been well documented. Take a look at our article from last year on outsourcing investment expertise.

But the current situation may strengthen the case for delegating to a trusted third-party. Specifically, outsourcing to a DFM can:

Free up advisers to focus on the client relationship
Right now and for some time to come, clients may need a lot of handholding. Delegating day-to-day investment decision-making can allow your professionals to spend more time at the sharp end of client support – and the bit that clients may most value.

Allow for a faster response to market events
If you’re managing portfolios on an advisory basis, you’re obliged to seek consent from each individual client for every buy and sell decisions.  A service with full discretionary permissions can ensure a much swifter, efficient responses to fast-moving situations.

Provide expertise on specific market challenges
Advisers haven’t had to contend with rocketing inflation for over for 30 years. As a result, it may be easy to underestimate the devastating impact that rising prices can have on a portfolio (see panel below) and on assets such as bonds. If you also throw in volatility created by events in Eastern Europe and the energy market, then the challenges to devise an investment strategy that can protect capital, generate a real income and keep within a client’s specific risk tolerance can become especially daunting.

Impact of inflation on £100,000

Over 3 years

Over 5 years

Over 10 years

2% inflation pa

£94,119

£90,392

£81,707

5% inflation pa

£85,738

£77,378

£59,874

7% inflation pa

£80,438

£60,569

£48,398

*Source: visit the Platform and the Tools hub to try out this inflation modeller

Navigating events

Particularly for firms focusing on servicing retiree clients reliant on a fixed pool of capital to generate a reliable income, the case for outsourcing in order to navigate the current market situation and its fall-out may be very strong. As is the need for a service that can clearly and robustly manage a portfolio in line with a client’s agreed risk profile.

Long-term strategy

Of course, a market beset by volatility may not feel like the time to move clients to a new service or make wholesale changes to their portfolio for fear of crystallising losses. But outsourcing isn’t a temporary fix. It should be considered in the context of a firm’s long-term business strategy – not just current market challenges.

If you feel hands-on portfolio management and making day-to-day investment decisions is a core part of your firm’s proposition and value, then outsourcing may not be for you.

But if your real passion is guiding and advising clients through their whole financial-planning journey – and the challenges they face along the way – then outsourcing the portfolio management element may be the solution to enable your strengths to shine. Whatever’s happening in the wider world.

See the full range of discretionary fund managers available on the M&G Wealth Platform.