Some financial advisors are into portfolio management and prefer creating investment portfolios for their clients. Others aren’t. For advisors who’d rather outsource some or all of their investment management in order to focus on comprehensive financial planning, they can turn to model portfolios. And increasingly, they do.

To use a trendy word, model portfolios are “curated” strategies of prebuilt portfolios where the design, construction and ongoing due diligence are handled by third-party providers. They first hit the scene in the early 1990s when Brinker, Lockwood and SEI rolled out mutual fund-based models, according to Scott Smith, director of advice at Cerulli Associates. Later, third-party strategists came out with models based on exchange-traded funds. Some asset managers believe the next stage in the evolution of model portfolios will incorporate sophisticated strategies—such as managed correlation—designed to provide a smoother ride than traditional modern portfolio theory.

A survey of advisors from FlexShares, the ETF unit of Northern Trust Asset Management, found that 43% of respondents used third-party managers for all or part of their investment management needs in 2018. That was up from 40% four years earlier. On average, advisors who employ external investment managers delegated 57% of their assets under management in 2018. In addition, 97% expressed satisfaction with those external solutions.

AssetMark found similar satisfaction levels in its “2019 Impact of Outsourcing Study.” Among the report’s other findings is that 68% of advisors said the use of model portfolios helped deliver stronger client relationships, 65% said it increased client retention, and 48% said it led to more client referrals.

“While outsourcing may not be right for every advisor, it was found to help meet a wide range of advisor goals,” the report said.

Granted, both Northern Trust and AssetMark are in the model portfolio business, so they have a vested interest in conducting surveys that put these products in a positive light. Still, various realities make outsourced model portfolios a good option for some, if not many, advisors.

For starters, many registered investment advisors don’t have the time, staff or other resources to build portfolios. And then there’s the fiduciary angle.

“We see fiduciary concerns as a big reason why advisors are outsourcing some of their investment management to these models,” says Nadia Papagiannis, practice lead for multi-asset class solutions at Northern Trust. “There’s the idea you have to provide the basis for all of your portfolio recommendations. And if you don’t have a staff that’s working full time on asset allocation and monitoring what’s going on in the economy, do you actually have a basis for what you’re recommending in your clients’ portfolios?”

She adds that the largest end users of model portfolios—and those who benefit the most from them—are financial advisors at insurance broker-dealers, bank broker-dealers and the smaller RIAs who don’t have a lot of home office investment resources at their disposal.

Tactical Investing

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