This content is from: Wealth Management

Against Recommendations, Advisors Are Spending More Time Playing Portfolio Manager

Financial advisors have been more involved in investment management during the Covid-19 pandemic, even as clients require more attention.

Financial advisors have been more involved in managing client portfolios since the spread of the Covid-19 pandemic, according to a new report, even though most probably shouldn’t be.The average team potentially capable of creating custom portfolios for clients has an average of nine people and those practices are often supported by a centralized investment group, according to Cerulli.

The majority of wealth management practices lack the personnel to properly manage investment portfolios. More than half of all practices, or 55%, rely on their own investment research and portfolio or model construction. But only an estimated 7% are capable of doing that effectively, according to Cerulli Associates, a Boston-based research and consulting firm.

TAMPs, or turnkey asset management platforms, which help wealth managers outsource some or all of their investment management responsibilities, have been (albeit, self-servingly) railing against ill-equipped advisors managing portfolios. “That is not where the business is going. And TAMPs are here to really make the advisors way more valuable to the end client, to the investor,” AssetMark CEO Charles Goldman told RIA Intel about the busy but little-known corner of financial services.

But a new survey published Wednesday suggests that advisors are generally not heeding the recommendations of researchers and others. Some are relying even less on third-party model portfolios this year.

Only 12% of advisors outsource investment management entirely and just 38% use third-party model portfolios at all. The rest rely on themselves and most don’t intend to change that. Asked if they planned to switch to third-party model portfolios because of the Covid-19 pandemic, 84% don’t plan to make any such changes, according to a survey of more than 300 advisors by YCharts.

Among advisors using model portfolios, 58% don’t plan to change how they invest in them, 20% plan to invest more, and 22% plan to invest less. When asked how Covid-19 has affected their comfort level with the third-party model portfolios they’ve used for less than one year, 41% said they were “much less comfortable,” according to the YCharts survey.

While their confidence in outsourcing investment management was unchanged or waned, advisors grew more confident in themselves as managers. Asked how Covid-19 impacted their comfort level building portfolios in-house, 31% said they were “much more comfortable” and 11% were slightly more comfortable. None were “much less comfortable” and 1% were slightly less comfortable.

This year, advisors have spent more time tending to nervous clients and their own businesses, which might have been strained by the market downturn. But even while pressed for time, advisors aren’t taking to third-party model portfolios, despite 72% surveyed saying that using them freed up time to spend with clients and prospects. 

Another 55% said using third-party models also gave them more time to spend on due diligence and back-office tasks, according to YCharts.

Advisors are increasingly focusing their businesses on financial planning and advertising themselves as guides on all matters of clients’ financial lives. But Wednesday’s report also affirmed that most advisors still consider investment management a critical part of their business. This is partly the reason they choose to build portfolios themselves — 79% of firms said investment management and research is part of our value proposition and 62% “want to be as flexible as possible with client assets.”

Taking away advisors’ autonomy over portfolios and leaving them feeling disenfranchised or without a critical part of the value proposition would be bad for wealth managers — those advisors might choose to go somewhere else (and take their clients with them). So, instead, they provide models and limit the menu of approved investments. It’s a balancing act that keeps wealth managers awake at night.

YCharts surveyed 319 participants; 60% had the title “advisor” and 38% were a “portfolio or investment manager,” which could explain some of the favoritism for in-house models. Sixty-three percent of participants were RIAs, 17% worked at independent broker-dealers, and the others worked at dual-registered or hybrid broker-dealers, or insurance companies. 

Half of the participants were managing less than $100 million in assets, 26% were managing between $100 million and $250 million, and the others were managing more.

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