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Many advisors are understandably reluctant to embrace model portfolios or outsource construction and management of client portfolios. However, there are benefits in these strategies.
First, let’s address the reluctance part of the equation. There’s the control factor. Just as it’s difficult for some clients that have long been do-it-themselves investors to convert from prospect to client and relinquish control of their portfolios to advisors, it’s hard for advisors to cede portfolio oversight to third parties.
Likewise, many advisors enter the business because they enjoy securities evaluation, research and selection. As far as motivating factors in becoming an advisor, love for investment selection is credibly near or at the top of the list. So with that in mind, some advisors view outsourcing portfolio management as a threat to one of things they most enjoy about the business.
Those viewpoints are understandable, but advisors don’t need to be consumed by negativity when it comes to outsourcing. No, drawbacks of outsourcing should not be ignored, but by focusing too intently on the downside, advisors risk ignoring the positives, of which there are plenty.
Marquee Advantages of Outsourcing
There are at least three big benefits of outsourcing portfolio management. One of which is obvious: time savings. With the time advisors save by not having to oversee and potentially micro-manage portfolios on a daily business, they can focus on other revenue-generating pursuits such as converting prospects into clients. Additionally, with the saved time, advisors can also work with existing clients on seeing the benefits of other fee-generating products such as life insurance and estate planning.
Speaking of model portfolios’ impact on clients, the potential is there to lower costs, which improves outcomes over time.
“The ability to leverage and implement model portfolios that employ a consistent investment process across all client accounts helps save on operational costs,” notes WisdomTree. “More than 50% of advisors who are currently outsourcing their investment management have reported a decrease in operating costs since they began outsourcing, with 40% seeing declines in costs of 5% or more.”
More time and reduced costs being perks of outsourcing might not surprise advisors, but some may be taken aback to learn that model portfolios can actually increase client satisfaction.
“Over 80% of advisors reported both stronger client relationships and increased client retention as a direct result of outsourcing; 67% of all advisors increased the number of client referrals,” adds WisdomTree. “Leveraging specialized expertise from third-party managers allows advisors to focus more on value-added tasks, deepening their understanding of their clients and building stronger relationships.”
Clients Actually Like Outsourcing
As noted above, model portfolios can create higher levels of client satisfaction because with the newly realized time benefit, advisors can devote more attention to clients. And yes, there’s often a linear relationship between more attention paid to clients and their levels of satisfaction.
Alone, that’s a compelling reason to consider outsourcing, but before doing so, advisors need to evaluate factors such as brand recognition and, more importantly, the level of service provided by the third party. That’s small homework and it’s worth committing to.
“What’s most important is that advisors emphasize that they're working with top firms to build well-diversified portfolios aimed at long-term success. Their role in communicating how clients’ investments align with their goals remains essential and does not change when using a third-party manager. In fact, they will have more bandwidth to do so with a larger client base,” concludes WisdomTree.
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