In March, the sudden spread of Covid-19 across the U.S. forced people to work from home and led to the fastest-ever bear market. Financial advisors were the busiest they’ve ever been; tending to clients and portfolios, and readying their own businesses to work remotely as the possibility of a prolonged downturn loomed.
In addition to helping clients understand and take advantage of the fast-changing federal support being doled out, advisory firms also applied for loans through the Payroll Protection Program. (How many received the forgivable loans, no one knows for sure.)
But amidst the turmoil, advisors still found time to get even more involved in managing client portfolios and the consequence of that has become apparent. The pandemic has interrupted the recent shift toward outsourced investment management, slowing a positive industry trend’s momentum, according to a report by Cerulli Associates, a Boston-based research and consulting firm.
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Sixty-two percent of wealth managers surveyed by Cerulli said they don’t plan to make any meaningful changes to advisor discretion over portfolios after the pandemic. But 29% — a “significant minority” — said advisors are seeking greater discretion over client accounts. Just 9% were more willing to outsource a few months into the pandemic.
“It’s easier for the advisor to make portfolio changes, and show the client that they are doing something, rather than having to explain why the home office or model provider is taking a ‘wait and see’ approach and that the advisor has limited ability to alter the portfolio in times of crisis,” Matt Belnap, a senior analyst at Cerulli, said in the report.
As a result, Cerulli expects the trend toward advisors outsourcing investment decisions could weaken — a failure by many to help themselves and their clients.
“Generally, Cerulli believes that more advisors outsourcing portfolio construction decisions is a positive development. There are some advisory practices that are simply not at scale or sophistication to construct portfolios that fit the needs of all their clients. Outsourcing to a professional, be it a third party or the home office, can deliver better, more consistent investment outcomes for clients of these practices,” according to the company.
Since the pandemic began, 62% of investors with advisors changed how they view their advisor’s performance, and 26% are “now questioning who they’re with.” However, the answer to better portfolios is not to spend more time on them. That responsibility should be outsourced. “Outsourcing to a professional, be it a third party or the home office, can deliver better, more consistent investment outcomes for clients of these practices,” Belnap wrote in the report.
Cerulli has estimated that only 7% of practices have the personnel in place to effectively manage portfolios themselves.
“Constructing practice-level portfolios, or a personalized portfolio for each client, takes massive amounts of time for activities such as investment research and manager due diligence. Advisors who can move beyond portfolio construction and security selection as their main value proposition can use this time to grow and scale their practice, more efficiently servicing clients they already have, and attracting new ones,” Belnap said.
To be sure, the trend toward outsourcing investment management is slowing, not reversing.
An increasing number of advisors are outsourcing some or all of their investment management responsibilities, as the role of the advisor evolves and investors seek more holistic guidance on their finances. This is especially the case for RIAs. The percentage of RIAs relying solely on themselves for investment management has fallen 18% over the last five years, according to Cerulli.
TAMPs, or turnkey asset management platforms, have railed against advisors clinging to investment management for those reasons. “That is not where the business is going,” AssetMark CEO Charles Goldman told RIA Intel about the busy but little-known corner of financial services.
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.