Old habits die hard.
Regardless of how reliant a practice is on model portfolios created by others, advisors generally want clients to view them as their money manager. Most still provide some form of security or fund selection and are reluctant to drop that role from their value proposition.
However, model portfolios can provide a win-win for advisors and asset managers.
An overwhelming 83% of RIAs use only their own practice’s models, a much higher rate than hybrid firms (64%) and wirehouse advisors (56%), according to a July report by Cerulli Associates.
Only 7% of independent RIAs surrender discretion over client investments to either a home office or third party and just 10% start with models of some kind and modify them. A mere 12% of all advisors outsource investment management entirely and only 38% rely at all on model portfolios created outside their own practice, according to the report.
Cerulli estimates that 22% of assets overseen by advisors would be better served by model portfolios created outside their practices.
“That’s the easiest thing to tell clients you do. ‘I run your money for you. I’m the chef and the recipe is all mine,’” said Scott Smith, the director of Advice Relationships at Cerulli Associates. “But I think we have to focus on advisors more as restaurateurs not as chefs.”
The firm believes that 41% of advisors’ assets are addressable to model providers, though current adoption has remained stagnant at approximately 12% over the last five years.
“I think the important thing here is this is the next big opportunity for asset managers,” Smith said. “It’s a new communication option for the sales team.”
BlackRock, Vanguard and others have created model portfolios, typically containing their own funds, giving themselves a chance to strut their research and other capabilities to attract advisors and the money they manage. In turn, the outsourcing frees up time for advisors to focus on other areas of their practice.
The growing marketplace for model portfolios prompted Morningstar this year to begin assigning forward-looking ratings on separate accounts at American Funds, BlackRock, Fidelity, Invesco and OppenheimerFunds that are representative of model portfolios.
Per a potential loss of autonomy for advisors, home office or third-party model portfolios need not preclude them from exercising discretion over clients investments. For example, an advisor skilled at picking, say, deep-value, small-cap stocks, could assert that expertise yet still rely on model portfolios for most allocations.
Ultimately, advisors need to be honest with themselves about their strengths and stick to them, Smith said. For most, however, trying to out-manage central investment offices at the largest brokerages and RIAs is an uphill battle, he said.