Low Rates, Aging Clients, and Where Advisors Will Turn for Help

In 2020, just 5% of independent RIAs relied fully on off-the-shelf models. However, they might turn to them for help in the low-yield environment, according to Cerulli Associates.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

Few private wealth managers outsource portfolio construction but that might finally begin to change. A prolonged low-yield environment is threatening to hamper retirement nest eggs and financial advisors will turn to model portfolios, and those building them, for help, according to a report by Cerulli Associates, a Boston-based research and consulting firm.

In 2020, 13% of advisors relied fully on off-the-shelf model portfolios built by their employer, an asset manager, or others. Even fewer independent RIAs (5%) leaned on those models entirely, despite only 7% of advisory practices being capable of effectively building their own models due to their size, Cerulli estimates.

But that might change, soon. As RIAs help retirees convert their savings into income, while juggling longevity risk and market risk, Cerulli expects they will seek help managing investments that they didn’t previously.

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Almost half of all advisors surveyed in 2020 said they were focused on generating income for clients in the coming 12 months — perhaps because so many clients are nearing or have begun retirement. Twenty-five percent of independent RIA clients are between ages 50 and 59 and 47% are 60 or older.

Fixed income is also a core part of asset allocation. It accounted for nearly 30% of RIA asset allocation for moderate risk portfolios. (Individual fixed-income securities accounted for 8% of the overall product mix.)

“Advisors recognize that both they and their clients benefit from the efficiency, pricing advantages, and expertise that come with outsourcing fixed-income management. These same factors drove the growth of laddered municipal bond separately managed accounts (SMAs). The need for income solutions will only increase in the coming decade,” according to Cerulli.

Assuming Cerulli’s prediction becomes reality, asset managers and model providers have much to gain. Partnerships with largest investment advisors and brokerages are “tempting” but there are a limited number of those opportunities, and they are hard to establish. Companies providing income-oriented models should look to the thousands of independent RIAs, a growing group increasingly seeking help building portfolios.

“The independent RIA channel may offer an ideal arena for establishing a foothold with its lower barriers to entry, especially for those with proven investment expertise that are launching new strategies,” according to Cerulli.

“Explosive growth may not happen overnight, but helping RIAs answer the income question while building critically important performance history can lay the groundwork for long-term success.”

Many companies have already acknowledged this opportunity and are working to help advisors when they come around to outsourcing.

AssetMark, one of the largest turnkey asset management platforms, has built a new suite of services specifically for RIAs with the goal of capitalizing on the fastest-growing type of wealth manager. Altruist, a venture-backed custodian technology company, has created a platform for RIAs that gives financial advisors access to model portfolios by Vanguard and Dimensional Fund Advisors, in addition to its own in-house strategies. YieldX, a Miami-based portfolio management software company founded in 2019, launched its first two products last fall.

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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