Wealthtech Insider (6/29/21)

Will Model Portfolios Hurt Your Business? Deconstructing the Arguments

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Rusty Vanneman

By Rusty Vanneman

An ever-increasing number of advisors use models within their firms, though the numbers are difficult to discern. It’s estimated as many as 70% of advisors use model portfolios of some kind in their practice. Despite the advantages that model portfolios offer, most advisors primarily manage portfolios in-house.

In a time when advisors are focused on growing sustainable businesses and offering a stand-out client experience, they are sensitive to anything that might impact the value they offer to investors. It’s worth examining the arguments I often hear against outsourced models. There are two primary reasons why the majority of advisors who run their own model portfolios don’t outsource the management of their client portfolios to a third party. One is based on fear, and the other is based on ego.

Advisors don’t want to become the ‘third wheel’

Some advisors approach the issue of outsourced portfolio management by asking themselves this question: “If I tell a client someone else is managing their portfolio, how can I justify charging an asset management fee?”

It’s true that the vast majority of the wealth management industry still runs on fees billed based on assets under management. However, if an advisor is doing more than simply selecting investments and making trades, this fear is unfounded. Any advisor offering planning services—holistic financial planning, tax planning, and more—is providing much greater value to clients than an advisor whose sole value is choosing investments.

If it ain’t broke…

Many advisors built their businesses over the years by making investment decisions for each client, and then managing those portfolios themselves. They’ve done it well for decades. They are justifiably proud of their results and point to their in-house management as a way to set themselves apart from competitors.

But the source of an advisor’s value has changed over the years… and the pace of that change is accelerating. An advisor’s pride in “what has always worked” can become a stumbling block on the road to greater growth. The opportunity cost of writing off outsourced models is the risk of falling behind… especially as the industry turns from investment-centric to planning-centric.

Understanding what investors want

Advisors who lock themselves into being only an investment manager are missing out on providing the most value to their clients. Case in point: A recent study from Russell Investments found when an advisor provides a holistic relationship extending beyond investment-only advice, they can offer as much as a 5% value gain to their clients. As advisors consider the impact of lowering fees throughout the industry, and the disruption that can be caused to their business as a result, this type of value add is critical for explaining the work done on a client’s behalf. What’s more, only one in 10 investors are opposed to placing their investable assets in model portfolios.

The modern investor comes to advisors for help with hard financial life questions. They need behavioral guidance and help meeting their goals in the present and for the long haul. Model portfolios can be easily tailored to an individual investor’s needs, and they give advisors the bandwidth to focus on what clients actually want.


Rusty Vanneman is Chief Investment Strategist at Orion Advisor Solutions, author of the book “Higher Calling: A Guide to Helping Investors Achieve Their Goals,” and host of “The Weighing Machine” podcast.