Rising Usage Illustrates Benefits of Outsourcing and Modifying Model Portfolios

  • More than 40% of financial planners in Australia use managed accounts to implement model portfolios.
  • There are three attitudinal segments of planners when it comes to selecting investments for their clients: outsourcers have minimal involvement, insourcers are deeply engaged in the build, and modifiers are somewhere in between.
  • Partnering with Investment Trends we sought to better understand outsourcers’ and modifiers’ usage and experience when it comes to managed accounts.

Model Portfolio User Categories

The use of managed accounts in Australia has expanded during the last decade, with managed accounts now representing around $95 billion of funds under management.1

Approximately 12,000 financial planners, or 70% of the Australian wealth management industry, now use or intend to use managed accounts according to the SPDR ETFs / Investment Trends 2021 Managed Accounts
Report. Among the top reasons for this strong uptake is that these structures support a wide spectrum of planners. The identified categories of model portfolio users include:

  • 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 and modifiers account for 67% of current managed account users. This article focuses on these two categories of model portfolio users. 


Outsourcers and Modifiers

Both locally and abroad, most outsourcers and modifiers sit within the “majority independent planner channel.” This may not come as a surprise given this group of planners is able to access a wide variety of managed account investment solutions. Moreover, in the US there is less of an incentive to recommend internal products for this channel of planners. 

Additionally, in Australia, modifiers and outsourcers tend to be from the younger adviser demographic (aged 18-39). As such, we expect these two categories of model portfolio users to grow going forward.

When planners where asked how they have benefited from using managed accounts, outsourcers are more likely to cite a reduction in operational risk and a lower compliance burden. In fact, 56% of planners that outsource investment selection do so because it reduces risk for their practice. The modifier model portfolio segment most often recognised that managed accounts have freed up their time to focus on other tasks. Moreover, a quarter of planners outsource because it lowers the cost of providing advice, for example, by using an external asset allocation model portfolio or model portfolio core. A further 30% say they outsource because it results in better investment returns for their clients.

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 planners to dedicate more time and energy to client relationships, resulting in a better understanding of each client’s specific circumstances.

Value Proposition

Modifiers and outsourcers have noted the benefits of managed accounts to their practice and clients’ investments, but how do model portfolios implemented via managed accounts impact the planners’ value proposition? For all model portfolio planners, managed accounts are valued for their ability to shift a planners value proposition –  to allow more time for discussing client goals and education. Outsourcers and modifiers 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. 

Multiple responses permitted. By Planner involvement in investment selection. Among current managed account planners

When planners reflected on their experience throughout the COVID-19 pandemic, outsourcers and modifiers most often cited managed accounts as ‘good’ or ‘very good' in respect to strengthening the planners’ value proposition. Given that managed accounts had a more positive impact to outsourcers’ and modifiers’ value proposition throughout the COVID-19 pandemic, this is another reason we believe these two categories of model portfolio users will grow going forward.

Implementation Ideas

Modifiers and outsourcers use the State Street ETF Model Portfolios to outsource part or all of their asset allocation responsibilities. The key attributes for these model portfolios are outlined below.           

The portfolios offer:

  • Effortless outsourcing: access everything you need to get started and ongoing materials to support your long-term 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.