Wealth managers are moving away from a strictly in-house approach to research as their in-house teams struggle to cover the full range of investment areas, says a new report produced by Scorpio Partnership and commissioned by Standard & Poor’s.

The research, based on insights from decision-making personnel at 83 wealth management firms across Germany, Switzerland and the UK, found that over three-quarters of wealth managers see weaknesses with the "in-house" research model and more than a third think the current model they are using has resulted in gaps in their research coverage.

The wealth managers surveyed stated they frequently use research to generate and validate investment ideas, and it therefore represents a vital aspect of the investment process.

Ironically, another report by Scorpio, based on a survey of wealth managers, found that clients are increasingly preferring to use "in-house" investment products.

In the latest survey, Scorpio and S&P note that the UK market is dominated by in-house research, with 75 per cent of wealth managers using a combination of in-house and external (mainly sell-side) research, and the remaining 25 per cent of wealth managers using only in-house research. Outsourcing was more prevalent in Germany, with 20 per cent of wealth managers interviewed already having moved to a fully outsourced model compared with none in the UK.

Both of these models pose problems, as the report found that internal research cannot cover the spectrum of topics that wealth managers need information on, while on the other hand it is hard to find genuinely independent outsourced research at an affordable cost.

Specific problems identified in the report included: the absence of independence associated with sell-side material, a lack of substantial private client-oriented research made available by the provider market, a lack of macro/themed and qualitative material, and the need for targeted and actionable recommendations.

The market is looking to external providers to improve on the current picture, says the report, but does not have a clear way of moving forward.

"The Scorpio research has highlighted the fact that private wealth managers don’t have the in-house capabilities to fully serve their clients' needs, and sell-side research not only lacks qualitative tailored solutions, but is also increasingly questioned for its recommendation bias,” said Yannick Mathieu, vice president of Standard & Poor's equity research.

The extensive research and due diligence required on hedge funds, which are becoming more important to private investors’ portfolios, strain in-house research capacity, while external research is likely to be fund-biased, said Standard & Poor’s. Meanwhile there was also a lack of research around exchange traded funds, and the report found there was a desire for independent research in this area.