Why More Advisors Are Outsourcing to Model Portfolios

Models are having a moment … and not the runway kind.

More advisors are turning to third-party model portfolios in order to save time and go after wealthier clients. More than 80% of fee-based advisors now use models, a category that has roughly $8 trillion in assets. Models can free up advisors’ time for things like tax management and client meetings. Advisors who outsource spend just 10% of their time on investment management, according to Cerulli’s latest report. Less time spent crafting a portfolio means more time to spend courting ultra-high-net-worth and high-net-worth customers.

“We’ve seen across the board that some of these younger advisors definitely are more open to outsourcing that portfolio management aspect in terms of utilizing models not necessarily created in house,” said Kevin Lyons, senior analyst at Cerulli and an author of the report. “It opens up so much more time for them to really do everything else in their practice.”

No Role Models

Advisors who outsource their investment decisions to model portfolios tend to be younger and build portfolios tailored to each client, the report found. While the main value proposition of advisors used to be investment management — the ability to select securities and build out a portfolio — that’s no longer the case, Lyons said. “So much more of their value proposition today is based around comprehensive financial planning, comprehensive tax management, just other things that go beyond strictly investment management,” he added. There are also different degrees to which advisors rely on outsourcing, ranging from those who use the exact models created by broker-dealers and asset managers to advisors who customize them on a client-by-client basis. According to the report:

• 55,928 advisors are “outsourcers,” meaning that they use models suggested by third parties without modification.
• 55,829 advisors are “modifiers,” meaning they rely on external models but make modifications to fit client needs.
• 177,660 advisors are “insourcers,” which means they use the resources of their practice to manage their clients’ investments or build custom portfolios themselves.

Outta Time. With client expectations growing and service costs getting pushed lower, it was inevitable that models would be tapped as a time-saving measure, Lyons said. “It’s a combination of factors,” he said. “Expectations from clients have grown across the board, and that younger generation of financial advisors tends to show a little bit more willingness to give up that investment management portion.”