Outsourcing Model Portfolios on the Rise

2022 is the first year where more than half of financial planners in Australia use managed accounts. Outsourcers account for just under a quarter of current managed account users. Partnering with Investment Trends, the SPDR ETFs / Investment Trends 2022 Managed Accounts Report. sought to better understand outsourcers’ usage and experience when it comes to managed accounts.

The use of managed accounts in Australia continues to gain traction, with managed accounts now representing around $135 billion of funds under management.¹

One in two financial adviser utilise managed accounts, up from just 16 per cent a decade ago. A further 18 per cent may do so in the future according to the SPDR ETFs / Investment Trends 2022 Managed Accounts Report. Among the top reasons for this strong uptake is that these structures support a wide spectrum of advisers. Model portfolio users can be categorised as:

• Outsourcers: users of externally built asset allocation model portfolios – those who fully cede discretion over the portfolio to a third party and do not modify the portfolio on a client-by-client basis.
• Modifiers: begin with model portfolios that are generated externally but customise the portfolio for each client. Or use a core and satellite strategy where the externally managed model portfolio is the core.
• Insourcers: rely entirely on resources within their advisory business for portfolio construction.

Outsourcers account for just under a quarter of current managed account users. This article focuses on this category of model portfolio users.

Outsourcer Demographics

Of the current managed account users in Australia, outsourcers make up 27% of users that sit within the aligned financial adviser channel, 26% of users that own their AFSL and 20% of users that are from the majority independent. Whereas in previous years outsourcers predominantly sat within the majority independent channel. This may not come as a surprise as advisers pursue a more-holistic, total-financial-health approach and by outsourcing the investment selection advisers can now shift their focus toward meeting clients goals.

Further, both locally and abroad, outsourcers tend to be from the younger adviser demographic (aged 18-39). We believe this is because outsourcers are provided the time to focus on growing their books of business without the need to hire specialised investment staff. This is particularly attractive for the younger adviser cohort, helping to increase thin margins early in their career. As such, we expect this category of model portfolio users to grow going forward.

When advisers where asked how they have benefited from using managed accounts, outsourcers are most likely to cite a reduction in the cost of providing advice and a lower compliance burden . In fact, 64% of advisers that outsource investment selection do so because it reduces risk for their practice. Moreover, more than half outsource because it provides access to institutional grade investment management.

Our proprietary global research, Model Portfolio Solutions and the Client, conducted by the SPDR Global Practice Management team, further investigated how outsourcing portfolio management affects the client experience. Again, clients with assets in model portfolios strongly support their use, reporting positive impacts. It seems that these investors see the big picture: using model portfolios allows advisers to dedicate more time and energy to client relationships, resulting in a better understanding of each client’s specific circumstances.

Time Saved

The time savings of managed accounts has continued to increase as the solutions mature and proficiency levels rise.
Managed accounts advisers say they save 15.7 hours on average on a typical work week (up from 13.0 hours in 2020).

The time saving increases as the adviser elects to outsource the investment management. Specifically, outsourcers saved 19.1 hours a week, that’s over 2 days a week (assuming the work day is 8 hours). As advisers seek to increase the time spent with their clients to deepen relationships, we expect the number of advisers utilising outsourced solutions to increase.

Value Proposition

Managed accounts are valued for their ability to shift an advisers value proposition. While all managed account users have noted positive impact to their value proposition, outsourcers more often realise this impact. Outsourcers more often cite the shift to value proposition with greater focus on client financial and lifestyle goals. Specifically, 35% of outsourcers say managed accounts have strengthened their value proposition by distancing it from investment returns.

Implementation Ideas

State Street ETF Model Portfolios presents the opportunity to outsource part or all of asset allocation responsibilities. The key attributes for these model portfolios are outlined below.

• State Street Risk-Based ETF Model Portfolios: focused on risk tolerance and return expectations, and can be utilised as a core allocation for investors with a diverse set of risk and return objectives.
• State Street Target Income ETF Model Portfolio: providing income through a diversified investment approach. Portfolio construction is focused on a target annual income objective.

The portfolios offer:

• Effortless outsourcing: access everything you need to get started and ongoing materials to support needs, from educational material and practice support to regular investment commentary and performance reporting.
• Institutional expertise: benefits from the Investment Solutions Group proven expertise in research, strategic asset allocation and portfolio construction. Feel confident that the portfolios you recommend are continuously monitored by institutional managers.
• Open architecture: diversification should go beyond asset class to include multiple investment styles and managers, allowing clients to benefit from the ideas of independent investment teams.
• Transparency: bring the reassurance of real-time visibility to portfolio holdings.
• Cost-effective access to best-in-class model portfolios: with a simple fee structure and ongoing asset allocation at no additional cost.