Model portfolios are a popular investment strategy that involve investing in a diversified suite of asset classes, using building blocks such as ETFs or managed funds. Model portfolios implemented via managed accounts continue to gain popularity both locally and abroad. In Australia, more than one in two financial adviser utilise managed accounts, nearly tripling from a decade ago (17 per cent). A further 22 per cent may do so in the future. As the model portfolio industry continues to evolve to meet investor needs, the SPDR ETFs / Investment Trends 2023 Managed Accounts Report observed the rise of outsourcing investment selection and customising model portfolios.
When a practice outsources portfolio management, it is not opting out of investment responsibilities — it’s selecting a partner, a third-party investment manager with capabilities to complement all or part of the investment function. Outsourcing model portfolios in Australia has become more prevalent with the increased regulatory requirements imposed on financial advisers, such as education requirements. Interestingly, advisers that use managed accounts are more likely to outsource asset allocation. Some of the most compelling reasons adviser are choosing to outsource investment selection is that it provides more time to focus on meeting client goals and engaging/educating their clients, or lowering cost to provide advice.
In the United States (US), outsourcing model portfolios has been a consistent trend for a longer period of time. This is largely driven by the fact that the US is a larger market, with more investment management firms, and the need to scale operations has made outsourcing model portfolios increasingly popular. The number of advisers that outsource model portfolios is on the rise, with many realising the benefits for a subset of clients or realising part of the benefits from modifying model portfolios. However, once the adviser experiences part of the benefits, they tend to completely outsource. In the US assets are moving from those that modify portfolios to outsourced portfolios.
Overall, outsourcing model portfolios is a trend that is likely to continue in both Australia and the US, as it offers many benefits for financial advisers and their clients.
Customising a model portfolio allows an adviser to tailor an investment strategy to the specific needs of the investor. For example customising may involve excluding a particular asset or it may involve substituting asset classes i.e. if the client has a preference for passive investment management, advisers can swap the allocation to the preferred strategy. The ability to customise is reliant on the managed account platform, as technology evolves the ability to customise improves.
For Australian financial planners that recommend Separately Managed Accounts (SMAs) 72% do not customise the models for clients, 20% will for some, 8% will customise for all. Further, among current managed account advisers who use customised managed accounts models do so because the client has specified product preferences, or to achieve ESG alignment, or to increase exposure to passive investment. Whilst customising may benefit the end investor, and in some cases be necessary to manage clients assets, those that customise need to consider the benefits of customising versus the cost of customising. As customising reduces the time savings for those that use managed accounts.
In the US, the growth in customising occurred earlier on. However, many advisers learned that while customising can be additive for a handful of clients, it creates challenges when it comes to using the materials explaining performance and asset allocation. Ultimately, being able to leverage the expertise and resource of large asset managers is beneficial for clients and customising restricts this ability. The key is to be careful when deciding if its appropriate to customise.
The flexibility of model portfolios implemented via managed accounts is one of the reasons these investment structures continue to grow in use. Outsourcing and customising are dominant trends for 2023, but we are confident the spectrum will evolve over time. Speak with the State Street SPDR ETFs Team to further discuss how you can apply learnings from SPDR ETFs / Investment Trends 2023 Managed Accounts Report as you implement model portfolios in your business.