Advisors are Adopting Technology, Model Portfolios

According to a recent report, more consulting practices are embracing technology upgrades, direct indexing, and model portfolios as they seek to devote more time to customer service and business development.

According to findings from The Cerulli Edge – US Advisor Edition, model portfolios, when used appropriately, can effectively save time advisors spend on portfolio management, allowing them to reallocate that time to other very valuable functions, including providing financial planning services and wealth raising

One hurdle many companies face when trying to increase efficiency is technology, as companies and consultants start from different places, the report says. Technology is a leading source of scaling, customer retention and employee recruitment – and in some cases has a better competitive advantage than pure portfolio performance.

According to the report, consultants cite insufficient time (70%), compliance concerns (64%) and high costs (58%) as the most common challenges in managing and implementing technology in their practice. Advisors recognize the value of technology solutions, but often only focus on making the most necessary elements of the platforms a part of their standard workflows.

According to Cerulli, 57% of sales leaders prioritize improving company-specific digital experiences for consultants. They have plans to create predictive sales analytics (74%), provide additional resources for wholesalers such as iPads or portfolio analysis software (57%), improve their social media presence (43%) and implement artificial intelligence (11%).

“Consultants and wholesalers can no longer rely solely on face-to-face meetings with customers. They must enable a digitally driven experience enhanced by face-to-face interaction,” says Cerulli. “Effective use of technology signals to clients that a practice is ready for the future. … New tools are being added to the toolbox, but human interaction and trust remain an important component going forward.”

Portfolio Customization

Tailoring portfolios through direct indexing strategies is a top priority for both wealth managers and wealth managers, but few advisors have embraced it in their practice, the report said. As a result, advisors have the opportunity to differentiate themselves through personalized portfolios mixed with tax alpha.

According to Cerulli, direct indexing — an investment strategy for separately managed accounts that aims to generate index-like returns — has been a key focus for advisors because of their ability to tailor investments to each client’s unique goals and beliefs.

For example, if a client wishes to exclude oil and gas stocks, they can do so while the manager works to generate returns within agreed-upon fluctuations from the target index.

The most popular customization among direct indexing strategies is taxes. Owning the underlying securities not only protects an investor from unwanted year-end capital gains distributions, but also provides the opportunity for targeted loss absorption strategies, the report says. A second widespread use for direct indexing stems from value alignment through environmental, social and governance investments.

“As ESG continues to rise in public awareness, with increasing relevance for the next generation of potential customers,” says Cerulli, “it believes alignment with values ​​and beliefs will continue to represent a major opportunity.”

Arguments for model portfolios

Many successful consulting practices use model portfolios, which give consultants the space to better serve their clients and grow their business, says Cerulli. For advisors who want to focus on other financial and advanced planning options, adopting model portfolios should buy time.

Cerulli expects planning offerings to increase over the next year, and by 2023, 82% of clients will receive targeted comprehensive financial planning services from advisors.

Most consulting practices fall into the “insourcer” category (68%), meaning they either customize portfolios on a client basis or use practice-level resources to create a series of custom models for use with their clients.

While insourcer practices spend 18.5% (practice models) and 29.5% (adaptors) of their time on investment management, a model portfolio usage allows advisors to reduce that time investment to less than 10%, the report states. This saved time can be used for client-facing activities, an important activity in building an immature practice.

Larger advisory practices are likely to adopt the use of model portfolios for smaller client accounts with lesser assets, allowing advisors to focus more time on high-net-worth and ultra-high net worth clients, the report said. The average client size of a sample portfolio user is $703,720, while the average size of a non-user is over $4.6 million.

Model portfolios are likely to typically benefit younger advisors as they seek to group their overall business by giving them more time to focus on relationship management, the report said. Younger advisors can also gain a competitive advantage as they are able to serve more clients than a more traditional, older advisor.


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