Advisors increasingly rely on home office models, survey says

Most financial advisors base investment decisions on home office models, with new data showing that the profession continues to move more toward planning and customer service.

With a surfeit of models available from home offices and third parties such as asset managers, asset allocation is now all but commoditized, according to a report Monday from Fuse Research Network.

That doesn’t mean that the majority of advisors are relying exclusively on home offices to tell them how to allocate clients’ assets. Instead, most use models as a starting off point and customize them to various extents, according to Fuse. Only 10% of all the advisors the firm surveyed said they use home office models with little to no modifications.

“There is no question that wirehouse advisors are the most influenced by home office models,” said Fuse partner Mike Evans, the firm’s director of advisor and benchmark research.

Those at RIAs and independent broker-dealers are much more likely to build their own allocations from scratch, with 36% in each group saying as much, compared with just 9% of wirehouse advisors, according to the report.

Regardless, “it’s the great majority [of all advisors who] fall into that umbrella in the middle, where it is a core input or tangential input,” Evans said.

The findings are the latest to show the proliferation of models, but other surveys have shown even higher usage. A 2019 report from Broadridge, for example, found that 85% of advisors use them, with 78% saying at the time that clients value planning more than performance.

By focusing less on investment decision-making, advisors can put more energy into growing their businesses, a report last year from Cerulli noted. While advisors who customize portfolios for each client spend nearly 30% of their time on investment management, those who have firmwide portfolio services allocate less than 19% of their time to that cause, the company found.

The percentage of advisors using models, or planning to, increases slightly every year, and that trend is a good thing for the industry, Evans said. It allows advisors to focus more on other aspects of their business — something those in the profession have indicated is increasingly important to clients. But there are also wider benefits to firms, including ease of compliance.

“The home offices like that too, because it affords them a consistent investment solution for their different clients,” he said.

“Having core models across qualified and nonqualified portfolios makes the business of being a portfolio manager and a financial advisor more scalable,” said Vance Barse, wealth strategist and founder of Your Dedicated Fiduciary.

Still, it’s notable that just under a third of advisors on average across all channels said that they don’t consider home office asset allocation services.

“They’re concerned that one of their core value propositions … is that [they’re] really good at picking strategies and putting together an asset allocation plan,” Evans said.

That’s easier for CFAs, who are “more like to be comfortable coming up with customized portfolios of ETFs, mutual funds and stocks” than for advisors without the same level of knowledge and skills in investment selection, Barse said. “You can start from scratch and build a customized portfolio, or quite simply, you can reference the home office portfolio and at the core know it has been approved by the home office compliance.”

Something that advisors should consider is that there is a positive correlation with the use of models and assets under management, Evans said.

“Two of the most important advisor segments — advisors with the largest books of business and advisor teams with in-house due diligence — are significantly more open to using both home office models and manager research,” the report noted. “These two groups have established businesses with internal capabilities to build client asset allocations and conduct manager due diligence.”

More than 35% of assets at advisor teams use home office allocation services, compared with about 27% for independent advisors, Fuse found.

But there is a somewhat of twist. Although 71% of advisors use home office models to some extent, those models are applied to just 30% of assets. One explanation is that the bulk of assets are with legacy clients for whom asset allocation has been done without the use of models, Evans said.

According to results of the survey, advisors expect that within two years, an average of 32% of client assets will be allocated at least in part by using models. That's just a slight increase from the current rate, but it's telling that advisors with teams and higher levels of assets under management are the most likely to use such services, Evans said.

For example, 42% of assets at advisors who have more than $500 million under management are allocated based at least in part on home office research, compared with 25% among advisors with less than $100 million.

“They are the ones who are the heavy users and are more influenced by it,” Evans said.