Financial Advisors Use Model Portfolios to Scale Their Businesses

Financial advisors are relying heavily on model portfolios as their businesses become more complex, a survey released by Broadridge Financial Solutions found.

Eighty-five percent of financial advisors currently use model portfolios, and 70% combine models with custom portfolio design, according to the survey. Respondents reported that 54% of advised assets were in model portfolios, and said they expected that figure to rise to 58% over the next two years.

Both users and non-users of model portfolios said business scalability was the primary driver of the adoption or consideration. Other reasons advisors said they used models:

• Leveraging investment management experts — 50%
• Focusing efforts on client building and retention — 47%
• Better addressing compliance and regulation — 36%

Seventy-eight percent of advisors in the survey thought that their clients cared more about planning, service and support than about outperforming the market, and 83% agreed that model portfolios were essential to giving themselves more time for financial planning.

“By shifting assets to model portfolios, financial advisors are acknowledging that they aren’t just being asked to provide investment management expertise — they need to prioritize holistic financial planning and client service,” Matthew Schiffman, principal at Broadridge Financial Solutions, said in a statement.

“A focus solely on investment management limits the growth of an advisor’s book of business. As advisors find the right balance between custom and model portfolios for their practice, we foresee more assets flowing into models, particularly if usage expands among higher AUM accounts.”

Seventy-three percent of advisors said model portfolios were more appropriate for smaller portfolios, those of less than $500,000. Meanwhile, 46% preferred models for portfolios between $500,000 and $999,00 and 31% for portfolios of more $1 million.

Broadridge fielded the quantitative and qualitative survey of 500 financial advisors between March 21 and April 5.

Concerns about model portfolio usage remain, according to the survey. Among the 15% of respondents that said they did not use model portfolios to any degree, 69% insisted that they would definitely or probably not start to do so in the next two years.

Fifth-nine percent of non-users viewed money management as part of their value-add for clients, and 51% believed that their clients were paying expressly for customized solutions.

Other concerns resonated more broadly among advisors in the survey. Fifty-one percent said use of model portfolios made it harder to differentiate themselves from robo-advisors.

Forty-six percent said model portfolios were less effective in down or highly volatile markets, 45% said models made it harder to assess risk and 35% worried that their clients would view them as lazy for using models.

Asset Manager Support

The survey found that in the past three years, reliance on asset manager support has grown faster among advisors that use model portfolios than among those that do not — an increase of 50% versus 31%.

The main reasons for increased use of asset manager resources were scalability, growth and efficiency, better understanding a manager’s strategies to make informed decisions and providing more professional expertise and guidance on investments and the market.

Likewise, asset managers were the likeliest resource for advisors constructing or rebalancing portfolios managed in-house, according to the survey. Among those that used models, 74% leveraged asset manager support, 65% looked to Morningstar and 55% relied on in-house proprietary tools.

Advisors also found external communications from asset managers valuable, with 86% of advisors citing website resources, 81% email correspondence, 79% white papers and 70% webinars and conference calls.

“The surge of interest in model portfolios reveals a renewed purpose for asset managers,” Schiffman said.

He said asset managers need to consider putting more of their funds into model portfolios to meet demand, and creating more sophisticated products to attract higher-end investors.

As well, they need to equip their wholesalers with specialist knowledge and continually promote digital content that mitigates advisor — and ultimately investor — concerns.

— Check out Difficult Clients? Bring ‘em On, This Portfolio Manager Says on ThinkAdvisor.