More advisor practices are adopting the use of model portfolios to help advisors better serve clients and develop their business, according to a new report from Cerulli.
In fact, the industry’s slow and steady transition toward a financial planning-oriented service model will be a powerful impetus for the adoption of model portfolios, the firm reports in the latest Cerulli Edge—U.S. Advisor Edition, 4Q 2022 Issue.
And when used appropriately, model portfolios can be an effective tool that can free up time advisor practices spend on portfolio management, allowing them to reallocate that time toward other functions—not the least of which includes the delivery of financial planning services and asset gathering, the report explains.
Overall, Cerulli expects advisors to increase their planning offerings over the next year. By 2023, 82% of advisors’ clients will receive targeted or comprehensive financial planning services. Investment and financial planners are currently the largest advisor practice segment, and Cerulli expects that number will continue to grow as practices evaluate the time and cost of portfolio construction and broker-dealer home offices nudge advisors toward working more closely with clients, the report notes.
Among advisor practices, insourcers—those who either customize portfolios on a client-by-client basis or use practice-level resources to build a series of custom models—spend 18.5% (practice models) and 29.5% (customizer) of their time focused on investment management. Model portfolio use allows advisors to reduce that time commitment to less than 10%.
“This saved time can be put toward client-facing activities, a particularly important activity, for example, for younger advisors that are focused on asset gathering and building a book of business,” says Brad Bruenell, Associate Analyst at Cerulli.
Additionally, according to an executive from a large broker-dealer that Cerulli spoke with, more consistent investment performance through models is expected, due to the experience of those involved in their creation. “While home offices generally would prefer that practices use their models as designed, advisors have shown more interest in utilizing recommendations from more than one provider, thereby creating a mosaic approach using multiple inputs to create practice-level models,” the report emphasizes. This option, according to Cerulli, allows for the combined benefits of third-party expertise with the practice’s own guiding principles.
Advisory Practices
Meanwhile, the way in which model portfolios can fit into an advisor’s practice varies significantly, depending upon the individual circumstances of each advisor and their practice, the report further observes. For example, for younger advisors focused on building a book of business, model portfolios can be an effective tool to maximize the available time to spend on asset gathering.
For larger, more experienced advisory practices, model portfolios can be an effective way to efficiently service younger, less-affluent clients—such as the future expected inheritors of an advisors’ wealthier clients—enabling advisors to serve the financial needs of multiple generations of a family.
According to Cerulli, practices that outsource their portfolio construction efforts service an average client roughly half the size of those that insource their portfolio construction efforts. While just 13% of outsourcer practices have a core market of more than $2 million, more than 22% of insourcer practices have core markets of more than $2 million, the report notes.
Moreover, Cerulli continues to find a correlation of model users with younger, smaller advisory practices. Within the optimal classification, a model user’s average client size is $703,720, whereas the average client size of nonusers is $4,679,446.
Cerulli notes that it does not expect advisors who adopt model portfolios to service the high-net-worth (HNW) and ultra-high-net-worth (UHNW) segments without greatly building out their nonportfolio management offerings. The firm anticipates, however, that the average client size for advisors who adopt model portfolios to grow as the typically young advisors grow their overall business by having more time to focus on relationship management.
“The effective use of model portfolios can increase advisor efficiencies and service offerings in both maturing and fully mature practices, in a variety of ways depending upon the preference of the practice,” Bruenell further emphasizes. “We anticipate this trend will continue to gain traction among advisors in the future as they seek to improve their scale and service differentiation.”
