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Adoption of 3rd-Party Model Portfolios Stalled

Investment Management

Despite expectations that third-party model portfolios will dominate strategies and play a significant role in decision making for advisors, a recent survey finds that few new advisors have actually adopted such tools over the past year.

Instead, growth is coming almost entirely from a select group of heavy users who see value in spending more time building relationships with their clients than on individual investment selection, according to a new Cogent Syndicated report from Escalent on advisor use of model portfolios and SMAs. This finding, the report notes, suggests that the experience of advisors relying on these types of models has been positive so far, but that use may eventually reach an upper limit. 

The results are based on a survey of 336 registered financial advisors from October to November 2021 by Cogent Syndicated. To qualify, respondents were required to have an active book of business of at least $5 million in AUM and offer investment advice or planning services to investors on a fee or transactional basis. 

Among other things, the survey found that the proportion of advisors using model portfolios from asset managers (54%) and other third-party providers (35%) is unchanged over the past three years. In addition, more than half (52%) of advisors remain “most reliant” on model portfolios they create or modify themselves, using “always or often,” the report notes. 

Looking ahead, Cogent expects increased advisor use of model portfolios, driven by engaged and active users. Slightly more than a quarter (27%) of advisors using model portfolios reported increasing their use since the pandemic took hold—a significant increase from 14% last year, the report notes. In particular, heavy users of model portfolios provided by asset managers and other third-party providers say they recently increased their use, at 41% and 51%, respectively. 

“While overall use of third-party model portfolios is on the rise, that growth is coming entirely from advisors already using them,” observes Meredith Lloyd Rice, the report’s author and vice president at Escalent. “At the same time, providers have not been able to drive adoption with new advisors. Without consistent and meaningful conquest of new advisors, use will eventually reach an upper limit,” she suggests. 

Shifting Vision

Meanwhile, advisors who increased their use of third-party model portfolios articulated a “shifting vision” for their role, highlighting a desire to focus more time on client management. As clients look for more personalized and hands-on approaches from their advisors, third-party model portfolios become more and more attractive, the firm notes. 

And once advisors see consistency in results and put their trust in those models, they are able to spend less time managing individual investment selections and more time working with clients directly, the report further suggests.    

Yet not all advisors are convinced. According to the findings, some advisors feel that model portfolios do not perform as well as a more active approach in a volatile market environment or are not customized enough to meet the specific needs of high-net-worth clients.

“To attract new advisors to their model portfolios, providers must address common misperceptions hindering adoption along with extolling the benefits according to their most engaged users,” Lloyd Rice adds. “In addition to testimonials, providers should be offering education opportunities and highlighting critical results that will move the needle with advisors seeking to get out of the weeds of investment selection and back into the business of building long-term relationships with their clients,” she says.