Enhancing financial advice with model portfolios

Shifting demographics, changing attitudes toward advice, and growing regulatory and compliance requirements are placing greater demands on financial advisers to generate more efficiencies and economies of scale to meet their goals.

Despite these efforts, research from State Street Global Advisors suggests that advisers’ business practices are not always aligned with their goals. While advisers’ top business goals are deepening relationships with existing clients and acquiring new clients, a large portion of their time is spent on activities that don’t support these goals directly. In fact, advisers are spending significantly more time on portfolio management (23%) than on client-facing activities (15%) or prospecting for new clients (11%).

To combat these challenges, an increasing number of advisers are electing to outsource portfolio management by selecting third-party model portfolios. The efficiency of model portfolios enables advisers to refocus on their priorities and expand their client base by cost-effectively serving smaller but growing accounts. Outsourcing portfolio management also helps address capacity issues and lowers the operational expenses associated with managing portfolios in-house, including due diligence, administration and reporting.

In response to this growing demand, asset managers have developed a variety of model solutions designed to meet a wide range of portfolio characteristics such as time horizon and risk tolerance.

The abundance of model portfolio options gives advisers greater choice, but it also makes the selection process more challenging. To be effective, model portfolio due diligence must go beyond an evaluation of basic metrics such as investment process, performance and price, and include a comprehensive review of provider infrastructure, expertise and transparency.

Provider infrastructure

In a Greenwich Associates study examining ETF model portfolios, financial advisers reported that a lack of resources, which limits a provider’s ability to deliver on promises, was the most significant shortcoming for ETF model portfolio providers.

Given the wide range of options, advisers must carefully evaluate providers to determine if they have sufficient resources to meet their clients’ expectations. This is particularly important when it comes to communication, risk management, legal and compliance to ensure high-quality service and seamless execution as assets grow.

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Experience and expertise

As the number of model portfolios grows, so does variation among providers in terms of experience and expertise. There is no single best recipe for constructing and managing efficient portfolios. However, the due diligence process for the practice should confirm that providers have sufficient depth of experience and investment capabilities within a reliable investment framework.

Advisers are not just buying a model portfolio product but selecting a partner who will continue to support the portfolio in the future. Do they have dedicated resources to 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? Is this demonstrated within the portfolio team, among the back-office support and across the firm? Asking specific and detailed questions will help to identify the providers most likely to be value-adding partners for the long term.

Transparency into the process

Transparency into the investment process is especially important when evaluating performance reporting and any potential conflicts of interest or revenue-sharing agreements across model portfolio providers.

If the practice doesn’t already have one, consider developing a standardized process for reviewing performance reports from all potential providers or hiring a third-party expert to audit performance calculations and reports.

Strategy plus execution

Deciding to outsource is a big decision. Model portfolios may not be suitable for every client of every practice, but they can generate economies of scale and capacity to help meet practice-wide goals. Reallocating resources toward activities that are more closely aligned with business goals can empower advisers to add more value. Due diligence to identify the right partner provider is critical to meeting these goals and, just as importantly, to meeting client goals.

The decision to outsource portfolio management via model portfolios can be part of a more client-centric value proposition and more competitive business model. In fact, clients with assets in model portfolios usually receive more services from their advisers than clients of advisers not using model portfolios. Research also shows that investors with assets in model portfolios feel better about their advisory relationship and are more satisfied with the wealth management experience.

The right model portfolio strategy, combined with the right execution, will support the growth of the practice, allow advisers to better meet clients’ overall financial needs and give clients a more rewarding wealth management experience.

Brie Williams is head of practice management for the global SPDR business of State Street Global Advisors.

Related Topics: Model Portfolios