It takes time to provide personalized, actionable and impactful financial advice. This is time well spent when it adds value for clients, deepens relationships, and grows the business. But the competitive structure of wealth management has shifted and client needs are evolving, calling for a more efficient service model.
The introduction and wide-scale availability of outsourcing options has been influential in growing a financial advisor’s capacity to spend more quality time with clients, create investment process efficiencies, and strengthen the menu of services offered. Ultimately, this helps to achieve scalability.
What does it mean to outsource portfolio management? A third-party model portfolio manager handles the investment functions for the strategy, including research, risk management and administration. Outsourcing does not mean opting out of investment responsibilities on behalf of clients. Advisory practices maintain their rigorous process for selecting portfolios that reflect client goals and risk tolerances, using transparency into the strategy’s investment objectives and portfolio construction in their decision process.
Recognizing the challenges facing advisors in proficiently running client portfolios and in ceding discretion, my team at State Street Global Advisors set out to reveal the usage and perceptions of outsourcing, along with the impact on practice development, advisor value and the client experience. Our new research finds that advisors are, on average, spending more time on portfolio management tasks than on activities that support either of their top business goals—deepening relationships with current clients or client acquisition.1
Investors understand model portfolios and recognize their benefits The advice industry has long moved away from selling outperformance. Advisor value is better measured by the impact of services on investors’ financial outcomes.2 Case in point: In our research, most investors with assets in model portfolios agree that “My financial advisor understands my financial needs and goals,” while the fewest investors reported “My financial advisor’s only responsibility is to construct portfolios to match my risk tolerance.”
There is a perception that investors are either unaware of or opposed to outsourcing portfolio management and using model portfolios as an investment vehicle. In reality, the majority of investors are aware,3 and only 10% are opposed.4
While it may sound counterintuitive, investors with assets in model portfolios feel better about their advisory relationship and are actually more satisfied with the wealth management experience.5 The combination of greater personal attention from their advisor and high confidence in their investment portfolio generates strong feelings of trust and satisfaction among clients.
Investors see the bigger picture when it comes to model portfolios. They recognize specific benefits related to performance, risk and fees.
Investors Recognize the Benefits of Model Portfolios
My portfolio is being constructed by asset managers with more knowledge of the markets
My advisor can focus on what really matters to me
My portfolio has a track record that fits my risk tolerance
My advisor can spend more time helping me make more intelligent financial planning decisions
My advisor can be more flexible to my needs
I am better protected by a robust compliance structure
There is more robust due diligence on my portfolio
Source: State Street Global Advisors’ Practice Management Global Study, Advisor Productivity: Embracing Asset Allocation Models, 2019. Q: Is the following a benefit to you because your advisor has your assets in a model portfolio? (select all that apply; base 25; summary of “yes, a benefit”).
Outsourcing doesn’t diminish the advisor’s role in the eyes of the client Most advisors see that clients want more than portfolio management. Offering advanced financial planning services or helping clients maintain healthy decision-making in the face of market volatility are just two ways advisors can deliver meaningful improvements in clients’ financial lives.
For their part, advisors told us they are in this business to do more than manage investments. Many say that building long-term relationships with clients is their favorite part of the job.
Adopting an outsourced portfolio management strategy that aligns with the practice’s investment management philosophy can help advisors pivot to grow. The decision really comes down to economies of scale and capacity.
Change is challenging, but evolution and innovation also represent an attractive upside if objectively evaluated and engineered to work in concert with the vision for the practice. To learn more about how model portfolios can create essential value for the practice and for advisory clients, read our full report: Model Portfolio Solutions and the Client Experience.
1State Street Global Advisors’ Practice Management Global Study, Advisor Productivity: Embracing Asset Allocation Models, 2019. On average, advisors are spending more time on portfolio management (23.1%) than on either client-facing activities (14.7%) or prospecting new clients (11.3%). 45% plan to deepen relationships with existing clients and 54% plan to focus on client acquisition. Qs: What are your business goals over the next 3-5 years? (Select all that apply). What percent of your time is allocated to each of the following…? (Sum must equal 100%; activity reported as sum of mean percent). 2Morningstar, The Value of Advice: What Investors Think, What Advisors Think, and How Everyone Can Get on the Same Page, 2018. 3State Street Global Advisors’ Practice Management Global Study, Advisor Productivity: Embracing Asset Allocation Models, 2019. 62% of investors are aware of model portfolios. Q: Is this consistent with what you have heard about model portfolios?/Have you heard of this investment vehicle? Does your advisor have any or all of your assets in a model portfolio? (Select one). 4State Street Global Advisors’ Practice Management Global Study, Advisor Productivity: Embracing Asset Allocation Models, 2019. 10% of investors would not like it and would find another advisor if their assets were put into model portfolios. Q: How would you feel if your advisor wanted to put your assets in a model portfolio? (Select one). 5State Street Global Advisors’ Practice Management Global Study, Advisor Productivity: Embracing Asset Allocation Models, 2019. Overall, 85% of investors with assets in model portfolios are satisfied with their advisor, as opposed to the 75% of investors who’s assets are not in model portfolios that are satisfied with their advisors. Q: How satisfied are you with your financial advisor? (5-point scale).
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The views expressed in this material are the views of the State Street Global Advisors Practice Management Group through the period ended September 30, 2019 and are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies. The information provided does not constitute investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon.
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