Advisers may be struggling to adopt model portfolios

The popularity of model portfolios has been evident as large industry players — from Envestnet to Oranj — have ramped up offerings to keep up with advisers looking to outsource investment management and focus on other parts of the advice business. 

Yet, new research published on Wednesday shows advisers are still struggling with adoption. 

Just one in 10 advisers currently use a model marketplace to access third-party portfolio strategies, based on a survey from the data analytics firm YCharts that queried 319 advisers in June and July. Of those not using a model marketplace, only 39% would be interested in using one in the future.

A study from Cerulli in June also found that a vast minority of advisers, just 16%, are using asset allocation models as their primary portfolio construction process — although advisers using them in any capacity is likely to be much higher.

That hasn't stopped advisory firms from rolling out new products in recent months. Last Monday, Envestnet announced partnerships to provide two new models to its users, and Franklin Templeton announced in June the availability of its suite of a dozen outcome model portfolios also through the Envestnet platform. 

Not to be outdone, Orion Advisor Solutions and Oranj also announced partnerships with asset managers to provide model portfolios, spanning from conservative to maximum growth.

The increased market volatility due to COVID-19 could accelerate model adoption as some advisers reconsider their role in investment management of their clients’ assets, according to Cerulli lead analyst Brendan Powers. 

“Due to the sheer size, scale and speed of the decline and corresponding volatility, many advisers will need to reinforce their client-facing time to retain assets,” Powers said. “This could result in broader interest in and adoption of asset allocation models.”

The problem for advisers might be an over abundance of choice. Notably, the survey found a large number of advisers at smaller firms — with AUM under $500 million — were more likely to say that there's an overwhelming number of options out there when it comes to evaluating third-party models.

Trying to determine which one to use takes a lot of time and resources for a boutique firm, according to Caleb Eplett, vice president of product management at YCharts.

Advisers still want to be able to customize building their own portfolio, according to Aite Group’s head wealth management analyst Greg O’Gara. They are still figuring out how to best adopt the models. "They are looking for quick ways to implement portfolio management, but clearly still want to be able to incorporate their own investment philosophies to it," he said.

The majority of advisers understand the trade-offs. The choice between building portfolios in-house or through a third-party service often boils down to what their firm sees as its primary value-add to clients, according to Eplett.

“Advisers need to determine if their time is more valuable spent face-to-face talking to clients or is it more valuable really crafting the right investment strategy for those clients and then finding a way to deliver that value even if you don’t have as much face time,” he said.

Advisers are, clearly, grappling with the pros and cons.

When asked about the biggest advantage, 72% of advisers say using third-party model portfolios frees up advisers to focus on client engagement and strategic areas of business growth. By contrast, 76% of advisers say that third-party model portfolios may be a disadvantage if portfolio management is a big part of the firm’s value proposition.

However, advisers are prioritizing control over their clients’ portfolios — particularly in a volatile market. When asked about plans to switch to third-party model portfolios in light of COVID-19, 83% of advisers said they are not making any changes to their strategy, while only 16% say they’ll continue to build portfolios, but will evaluate third-party model portfolios, according to the survey. 

“Look at the last decade, it seemed like everybody had been talking about the trend away from [portfolio construction], which is a more passive approach to portfolio management and outsourcing those services when possible to save time for other tasks or to get in touch with clients,” Eplett said. “The pandemic has clearly pushed financial advisers to become more involved with portfolio management.”