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Many advisors are already deploying model portfolios, whether it be of the mutual fund or exchange traded fund variety, in their practices.
Model portfolios are a boon for advisors looking to streamline operations and spend more time building practices while focusing on other offerings, such as estate and tax planning and more. Data confirm model portfolios are resonating with registered investment advisors (RIAs).
“As of June 30, 2021, at least $315 billion was invested in third-party model portfolios, based on a survey of 28 of the leading model providers and data reported to Morningstar Direct,” according to the research firm.
By the end of 2021, it's likely that number was far higher, but what's interesting is that a case can be made that advisors may not be embracing model portfolios enough. At least not yet, but there are good reasons why they should.
Time Is a Valuable Commodity
In the 1987 classic “Wall Street”, Gordon Gekko said: “The most valuable commodity I know of is information.”
With no disrespect to the fictional Mr. Gekko, plenty of advisors are apt to argue time is the most valuable commodity. Hence, the utility of model portfolios.
“Advisors currently spend 23% of their time on portfolio management, while only spending 15% on client-facing activities and 11% on prospecting for new clients,” says Brie Williams, head of practice management at State Street Global Advisors. “This presents advisors with a disconnect to their business goals since client-facing activities and prospecting for new clients are regarded as some of the most important aspects of growing an advisory practice. Yet that time is limited if it is spent on portfolio management.”
Obviously, advisors should be spending time on both investment management and interacting with current clients/adding new ones. However, if there's an alternative to free up time on one of those fronts – and it's managing portfolios – why not seize that opportunity know it could pay off in the form of more new clients and more client satisfaction?
Along with the benefit of time efficiencies, the model portfolio space is evolving, presenting advisors with more options and more bespoke choices.
“What’s more, customized solutions and third-party model portfolios are not mutually exclusive,” adds Williams. “Today’s model marketplaces are among the most flexible approaches for outsourcing implementation; advisors can take advantage of pre-existing models from providers yet maintain discretion for tailoring these models according to firm philosophy or specific client needs .”
Outsourcing Doesn't Mean Lost Control
Some advisors look at model portfolios as outsourcing and while that's true, using model portfolios doesn't mean investment management control is fully relinquished.
One way of looking at model portfolios is that advisors are adding a partner, not losing control. And by bringing one a new partner, there are questions to be answered.
“Advisors are not buying just a model portfolio solution but rather selecting a model partner who will continue to support the portfolio in the future. Do they have dedicated resources that can consistently deliver performance throughout market cycles? Do they rely on star performers or leverage diverse teams? Will their organizational culture continue to attract top talent?,” notes Williams.
If an advisor is satisfied with the answers to those queries, model portfolios might just be right for the practice.