The use of model portfolios is not hurting advisor-client relationships, according to a recent study – in fact, it enhances them.
Yet some advisors remain concerned that using third-party investment models might paint them as lazy or less-than-competent in the eyes of clients and prospects. New research from WisdomTree finds just the opposite.
In fact, 86% of all of the investors in a WisdomTree survey were open to using model portfolios – if the function of the models were communicated to them properly. More than half, 56%, expected the use of models to have a positive impact on their personal portfolios.
“We’ve heard that advisors need to associate investment management with their core value proposition, and therefore they don’t believe in outsourcing or co-sourcing that piece of their work because it could damage the advisor-client relationship,” said Brad Shepard, head of advisor innovation at WisdomTree. “What we found was a really different point of view from the eye of the investor: models were welcomed ahead of the volatility, and during March’s volatility, a little over 90% of investors welcomed the use of models.”
Shepard said that there’s clearly a disconnect between advisors and clients regarding the use of models.
Part of the problem, said Shepard, is that advisors aren’t always effectively communicating to clients about their use of models.
“IF you communicate that ‘I as a financial advisor am going to outsource your investment management,’ that’s not going to resonate well at all,” said Shepard. “If you communicate that ‘I, as an advisor, have access to technology that allows me to see best-of-breed thinking from multiple asset managers,’ receptivity goes over 90%. Asset managers have the ability to focus on investing all day, every day. Advisors do not. Advisors have to describe themselves as the person in the middle, between asset managers and investors, who knows the investor intimately, personally and financially, and the strategies.”
Investors are unlikely to be swayed by discussions of the efficiency or ease of use of model portfolios, said Shepard.
The survey was conducted in two phases – one in January, when U.S. stock indexes were near record highs, and another in late March near their most recent bottom. A comparison of the two phases of the study yielded some interesting results for WisdomTree. For example, Shepard says that investors thought just as highly – if not more highly – of their advisors after the market bottomed as they did before. They also placed more importance on an advisor’s ability to explain the investments and strategies they recommended.
The March phase of the survey also found that client interest in customized investment solutions dropped during the volatility, said Shepard, with more respondents favoring managed solutions.