Over recent years, a turnkey adoption of third-party models has appeared to grow in popularity as more of the industry moves away from investments and asset management as their bailiwick. But 2020, as it has in so many other ways, has confounded trends even here. A little over 40% of advisors in a YCharts spring 2020 survey of 319 advisors felt less comfortable with third-party models than they did the year before.
However, a survey fielded at almost the exact same period by BlackRock among 100 advisors found just the opposite.
“Over three-quarters of the advisors we surveyed planned on using a lot more models over the next 12 months,” says BlackRock’s Weiss.
“I think it’s an evolutionary challenge,” says Rob Pettman, executive vice president for investor and investment solutions at LPL Financial, speaking of firms’ adoption of models. “Looking out into the future, my view is that the value proposition needs to evolve. As you look at financial advisors, some are at different points along that journey. There are advisors who orient more towards planning first and investment management second—it’s definitely still OK for advisors to have investment management as part of their value proposition.”
While there has been growth in the adoption of third-party models, most of the model portfolios in use today—53% of the market, according to Broadridge’s analysis—were built in-house by financial advisors and continue to be managed by them.
A Bit Like Robo-Advising
In some cases, the model portfolio trend mirrors what’s happening with clients and robo-advice—financial advisors are mirroring the simplified, low-cost and (most importantly) quick traits of digital advice by offering a mostly automated, easy-to-understand, model-based solution to their clients. In some cases, these advisors are even using robo-advisor-like models offered by the likes of BlackRock, Vanguard, Fidelity, Envestnet, State Street and Schwab that include the lowest-cost passive ETFs available and sometimes even offer the model allocations to advisors for free.
But the chief problem with off-the-shelf models is that they are typically tax blind, says Pettman. In many cases, they’re inappropriate for use outside of a tax-advantaged vehicle like a qualified retirement account. Still, as automated trading and rebalancing become more sophisticated, tax-aware model portfolios should become a reality.
Some of the divide between turnkey and bespoke solutions is generational: Advisors serving younger, lower-asset clientele are more likely to adopt turnkey solutions. Meanwhile, older advisors who cut their teeth in an era where investment management was their chief—sometimes their only—value proposition are more likely to stay with bespoke or highly customizable investment solutions.
But even that observation oversimplifies things, says Tim Clift, chief investment strategist for Envestnet.“Advisors are starting to figure out, if they’re older and aging, and they want to think about a succession plan, their practice is worth a lot more if it’s in third-party models,” Clift says. “That way the intellectual model building isn’t in their heads. If a third-party asset manager is managing all their assets, we don’t need to worry about transitioning a key person within their organization, and it makes succession planning a lot easier.”
Technology, like the kind offered by LPL and Envestnet, is making it easier to customize, blend and adapt models to better suit clients and advisors.
“I don’t think we’re quite there yet with customization,” says Clift. “By and large, if you buy into one of these models, you buy the model, but there is movement on creating more ability to customize either around tax management or creating ESG overlays on top of some types of models.”
Following the volatility in the spring of 2020, most advisors in the YCharts survey said that they would not significantly alter their use of models and that they planned to retain their current allocations to models. Just 20% said they would increase those allocations, while another 20% said they would reduce those allocations.
Today, it could be that differentiating along other lines of business—like financial planning, behavioral modification and management, wealth management, estate planning and insurance planning—is less effective for advisors as technology is now making many of these services commodities, just as it did investment management over the past decade. Clients may be placing more emphasis on the actual performance of their portfolios.