Advisors embrace technology and model portfolios

According to a recent report, more advisor practices are embracing technology upgrades, direct indexing and model portfolios as they seek to devote more time to client service and business development.

According to the findings of “The Cerulli Edge ― US Advisor Edition”, when used appropriately, model portfolios can effectively free up the time that advisory firms spend on portfolio management, allowing them to reallocate that time to other very valuable functions, including the provision of financial planning. services and asset collection

One of the barriers many companies have faced when looking to increase efficiency is technology, with companies and advisors starting from different locations, the report says. Technology is a major source of scale, customer engagement and employee recruitment, and in some cases it has a better competitive advantage than pure portfolio performance.

According to the report, advisors cite lack of time (70%), compliance issues (64%) and high costs (58%) as the most common challenges when managing and implementing the technology in their practice. Advisors recognize the value of technology solutions, but often focus only on integrating the most necessary elements of the platforms into their standard workflows.

According to Cerulli, 57% of distribution leaders prioritize improving business-specific digital experiences for advisors. They plan to generate predictive sales analytics (74%), provide wholesalers with additional resources such as iPads or portfolio analysis software (57%), improve their social media presence (43% ) and implementing artificial intelligence (11%).

“Advisors and wholesalers can no longer rely solely on face-to-face meetings with customers. They should enable a digital experience enhanced by face-to-face interaction,” says Cerulli. “Effective use of technology signals to clients that a practice is ready for the future. … New tools are added to the toolbox, but human interaction and trust will remain essential in the future.

Wallet customization

Personalization of portfolios through direct indexing strategies has been a key priority for asset and wealth managers, but few advisors have adopted them in their practices, the report says. As a result, there is an opportunity for advisors to differentiate through personalized portfolios combined with fiscal alpha.

According to Cerulli, direct indexing – a separately managed account investment strategy that seeks to provide index-like returns – has been a key focus for advisors as they are able to customize investments based on goals, objectives and unique beliefs of each client.

For example, if a client wishes to exclude oil and gas stocks, they can do so, while the manager will strive to deliver returns within agreed variations of the target index.

The most popular customization among direct indexing strategies is that of taxes. Owning the underlying securities not only protects an investor from unwanted year-end capital gains distributions, but also provides the opportunity for targeted loss recoupment strategies, the report says. A second widely applied use of direct indexing comes from aligning values ​​through environmental, social and governance investments.

“As ESG continues to grow in public consciousness, with increased importance to the next generation of potential customers,” Cerulli says, “she believes personalization around values ​​and beliefs will continue to present a strong opportunity.”

The case of model portfolios

Many successful advisory practices use model portfolios, which allows advisors to better serve their clients and grow their business, says Cerulli. For advisors looking to focus on other advanced and financial planning capabilities, adopting model portfolios should free up time.

Cerulli says he expects to see planning offerings increase over the next year, and by 2023, 82% of advisor clients will receive comprehensive and targeted financial planning services.

Most advisory firms fall into the category of “insourcers” (68%), which means that they customize client-to-client portfolios or use firm-level resources to create a series of customized templates to use with their clients.

While in-house practices spend 18.5% (practice models) and 29.5% (personalization) of their time managing investments, using model portfolios allows advisors to reduce that time to less than 10 %, indicates the ratio. This saved time can be spent on client-facing activities, an important activity in building an immature practice.

Larger advisory firms will likely adopt the use of model portfolios for smaller client accounts with lower assets to allow advisors to spend more time focusing on high net worth and ultra high net worth clients, the report said. The average customer size of a model wallet user is $703,720, while the average size of a non-user is over $4.6 million.

Model portfolios will likely benefit generally younger advisors as they seek to consolidate their overall business by having more time to focus on relationship management, the report said. Younger advisors can also gain a competitive advantage in that they are able to serve more clients than a more traditional, older advisor.

Margie D. Carlisle