Amid the pandemic and market volatility, financial advisors remain divided on third-party investment strategies and their likeliness to adopt such solutions, according to a new report.
Advisors see certain benefits and trade-offs to both adopting third-party model portfolios versus in-house management and the choice often boils down to what a firm sees as its primary value-add to clients. However, the COVID-19 pandemic and its effect on capital markets has added new variables to advisors’ decision-making process, according to YCharts’ Coronavirus, Third-Party Models & In-house Portfolio Management survey.
YCharts explains that it set out to learn how comfortable advisors are leveraging third-party portfolio strategies and the perceived impact that outsourced investment management has on their relationships with clients. The firm also says that it wanted to understand how significant market events, such as COVID-19, impact the advisors’ willingness to be hands-off when it comes to their clients’ investments.
Comfort Level
The resulting findings reveal that volatility caused by the pandemic has spurred advisors to become more involved in portfolio management. And with the 11-year bull market coming to an end, advisors’ comfort levels with using third-party model portfolios have been reduced.
The survey found that of the more than 300 financial advisor respondents, 41% who onboarded third-party portfolios in the last year feel much less comfortable with those solutions. Even so, YCharts found that nearly 60% of advisors are not planning to make any adjustments in their use of third-party models in light of COVID-19’s effects. The other 40% of advisors are split on either increasing or decreasing the percentage of assets invested in those models.
Meanwhile, advisors who build portfolios in-house responded that they are equally or more confident in their investment strategies in light of COVID-19’s impact on the market. More than half of advisors that build portfolios in-house are no more or less confident using their own strategies, while 42% said they are even more confident after the market downturn caused by COVID-19.
Face Time vs. Personalized Management
For most advisors using third-party model portfolios, the biggest reported advantage is time savings, which respondents say frees up more opportunities to connect with clients or prospects, or complete back-office tasks.
According to the findings, 72% of advisors who use third-party models agree that outsourced portfolio management enables them to spend more time with clients and prospects, while 40% of advisors managing portfolios in-house acknowledge that they have less time to interact with clients and prospects.
By the same token, 71% of advisors who outsource portfolio management agree that a disadvantage of third-party models is a lack of personalized service, whereas 90% of those building and managing their own portfolios agree that they’re able to deliver more personalized service to their clients.
Cost savings and improved portfolio performance are, however, not seen as advantages of outsourced investment management, with half of respondents disagreeing or strongly disagreeing that they’re realizing those benefits, the report further notes.
Third-party Model Portfolios
An additional consideration is that the numerous investment strategies that advisors have at their disposal further complicates their decision-making process.
The findings reveal that 52% of advisors say the most difficult thing about evaluating third-party model portfolios is making “apples to apples” comparisons across different providers. Also, many respondents (44%) believe that the marketing materials are “too one-sided.”
The survey was conducted in July 2020, with 76% of respondents identifying as Registered Investment Advisors (RIAs) or dually registered RIAs, while 24% indicated employment at a broker-dealer.
