While the share of financial adviser AUM allocated to model portfolios has grown modestly in recent years, there has been a significant shift in how advisers use models, according to Model Portfolio: Adaptive Solutions for Portfolio Growth report by State Street Global Advisors, the investment management division of State Street Corp.
State Street's findings show that only 4% of the firm's advisors surveyed do not use model portfolios today, according to Brie Williams, global head of advisory solutions and wealth intelligence.
“What I think is a big takeaway based on the findings and looking at this over a five-year progression, it's no longer a question of whether counselors are using models in their practice, it's how much they're using them,” Williams said.
“There are really three main challenges that financial advisors are looking to address — the commoditization of financial management so they have a means of differentiating their value beyond personal portfolio creation,” she said. “There are client expectations for more comprehensive personalized advice. Of course, portfolio performance is central, but they're looking for a holistic package for the results they're looking to achieve. And the last thing is the use of technology and technology as it relates to models certainly helps to create dynamic flexible solutions to meet the changing needs that the market demands.”
According to advisors surveyed for the study, they are allocating about 39% of their total AUM to modeling portfolios today, up 7% from three years ago. At the same time, State Street found that US-based investors who had assets in the models were more satisfied with their financial advisors than those who did not. For example, 93% of investors with model portfolio allocations said their advisor understood their financial goals versus 79% of investors without such allocations. Ninety-two percent of model asset investors said their advisors provided useful financial advice versus 83% of all investors surveyed. Investors who held assets in the models were also more likely to think their advisor was optimizing the performance of their financial portfolio at 81% compared to 70% of all investors who thought so.
US-based investors with model assets were also more satisfied with the fees they paid their advisers. Seventy-nine percent said they were satisfied with the fees relative to the value of the service provided. Only 56% of investors who held no assets in the model portfolios were equally satisfied with their fees.
Just over half of advisors (54%) now build their own custom models, while 53% use third-party model providers and 45% rely on their home office or broker/dealers. For those using third-party providers, TAMPs were the most popular choice at 88%, followed by asset managers (76%).
For their part, the majority of US investors (63%) expressed the view that they do not care whether their advisor uses a self-built model portfolio or one provided by a third-party provider as long as they are getting inclusive finance. planning services. However, 70% of investors cited the lack of individual adaptation to a client's specific situation as the main obstacle regarding the possible use of model portfolios.
“As it relates specifically to customer-centric value, this is the advisor's practice moving from viewing models as pure operational support to an enhanced value proposition,” said Williams. “It really redefines them as relationship-based, it allows them to shift their time to focus on delivering personalized, holistic results, and it allows investors, when they measure the value of what they're pay, see this relationship beyond performance-based metrics. in the portfolio and really see the holistic opportunity that the relationship brings. Am I meeting the liquidity needs, the longevity needs, and the legacy needs that are in my life journey?”
The percentage of advisors relying on core models fell by 15% since 2019. Instead, most advisors either modify their models on a client-by-client basis (30%) or create custom models based on the assets of the customer (49%).
Today, most advisors (78%) prefer investment objective completion models, another 69% use target risk models, and 61% outcome-oriented models. Less than half (45%) use target date models.
What advisors value most when choosing a partner for model portfolios has also changed. In 2019, 19% of respondents indicated it was “performance”. Today, that number has dropped to 29%. Instead, 30% of advisors value “commitment,” 27% value “price,” 26% value “communication,” and 25% value “talent” and “transparency.”
When evaluating model portfolios, 45% of advisors rely on data providers such as Morningstar Direct and Bloomberg, while another 43% look to financial publications. About 40% of advisors use investment consultants to help them determine which models to use, and 38% look at the websites of model providers. Other sources of guidance include professional organizations (36%), independent platforms (30%), internal investment teams (22%), broker/dealers (21%), peer recommendations (15%) and wholesalers ( 13%).
State Street Global Advisors completed the study between March and May 2024 in partnership with A2B Planning and Prodege. The study included interviews with US SME providers, an online survey of 200 US-based financial advisors with at least $25 million in AUM, and eight interviews with US financial advisors who have at least $25 million in AUM.