Advisers shouldn’t be afraid to outsource portfolio management

WisdomTree research shows that clients are much more comfortable with the practice if it’s presented to them in the right way

Financial advisers thinking about outsourcing the asset management portion of their business might have a lot more success in pitching the idea to clients if they don’t call it outsourcing.

New research from ETF sponsor and asset manager WisdomTree shows that investors are more comfortable with their adviser handing off the asset management to model portfolios if it is presented as taking advantage of the available technology and resources.

“We don’t have a model issue, we have an adoption issue,” said Brad Shepard, WisdomTree’s head of adviser innovation.

“From the investors’ perspective, the first thing preventing more dollars from going into models is they don’t have a clear understanding of what a model portfolio is,” Shepard said. “They don’t understand the relationship between the asset manager and the adviser.”

The WisdomTree research on more than 2,200 wealthy individuals and 253 financial advisers found that the communication breakdown often starts at the home office level, and eventually finds its way to the end investor.

“If you’re a financial adviser and you tell a customer you’re going to outsource the asset management piece, we found that less than 20% of investors like that idea,” Shepard said. “But when it is repositioned by saying the adviser has access to a technology platform that allows advisers to see the thinking of lots of best of breed asset managers, the idea is accepted by more than 90% of investors.”

Outsourcing portfolio management continues to be a trend across the financial planning industry as advisers seek to differentiate themselves from robo-platforms.

With asset management largely becoming commoditized, advisers are presenting their value for the fees they charge in more holistic ways, while passing off the asset management to platforms that often use model portfolios.

As Shepard sees it, clients are on board when the outsourced asset management is presented as providing more access to better platforms and technology.

The research, which was published Tuesday, was completed in January, but WisdomTree went out for more feedback in May after market volatility spiked.

“What we found was that even fewer investors wanted customized investment solutions than they did pre-volatility,” Shepard said. “When they looked around and saw everyone was getting wacked, they realized everyone was in the same bucket, and I think they like the idea of more professionals thinking about their investments.”

This should be good news for financial advisers who have been scrambling to stand out as brilliant portfolio managers.

The advice industry is evolving into more of a relationship industry that is rapidly treating the minutia of portfolio management as a piece of the package that can be handled elsewhere, giving the adviser more time to build more and deeper client relationships.

“From an FA’s perspective, this should be, ‘I am one person and my job is to know you the investor and all the solutions available out there,’” Shepard said.

On that point, the research found the breakdown often begins in the home office, where advisers can become turned off by presentations that outsourcing to model portfolios can “increase efficiency.”

As Shepard explained, the idea of efficiency is not something that often inspires financial advisers and it certainly doesn’t resonate with clients.

“FAs don’t want to hear from the home office about what will make them more efficient,” he said. “A better way to present it is that the use of model portfolios can help advisers grow their business.”

The takeaway for financial advisers is that they might be burning time and energy trying to be portfolio management wizards when what clients really want is a holistic relationship to cover everything from tax planning to estate planning and beyond.

“FAs think their clients believe they should be managing the money and I think they believe [outsourcing asset management] will deteriorate their value proposition,” Shepard said. “But we found that is not true when communicated properly. I think the home offices have probably done a disservice by talking about models from an efficiency angle, versus a practice growth angle.”