Why Model Portfolios Are Important to Advisors

Outsourcing is an effective avenue for advisors to ditch mundane concepts such as record keeping and other back-office fare, but many are reluctant to outsource portfolio construction and management.

That makes sense. After all, acumen for and interest in investment is a primary reason why so many advisors enter the business in the first place. As such, despite the myriad benefits offered by these products, model portfolios are often met with skepticism among some advisors.

On the other hand, advisors, particularly those that want to take their practices to the next level, may want to consider model portfolios. Data confirm plenty of their competitors are doing just that.

Obviously, outsourcing takes on multiple forms, but when it comes to portfolio management and using model portfolios, data confirm clients are largely open to the use of model portfolios with many believing model portfolios boost performance. Conversely, only a small percentage of clients say they would leave their advisors upon learning of the use of model portfolios.

Translation: The vast majority of clients aren’t going to be put off by the use of model portfolios, effectively eliminating one of the excuses advisors hold for not considering this method of portfolio management.

Good Reasons to Embrace Model Portfolios

In simple terms, model portfolios can benefit advisors in a compelling avenue. By reducing time allocated to investment management, advisors gain more time to interact with current clients and foster new relationships, potentially expanding the practice along the way.

In a recent report, Brie Williams, head of practice management at State Street Global Advisors (SSGA), highlights the benefits of model portfolios.

“Centralized portfolio management options are integral to scaling advisory practices. By taking advantage of model portfolios — asset allocation strategies aimed at providing a full or complementary portfolio solution comprised of several investment strategy components, including ETFs and/or mutual funds — advisors are able to spend more time on client-facing activities, which is highly correlated to increased client satisfaction and wallet-share growth,” she writes.

As advisors know, there trade-offs in the day-to-day operations of a practice, just as there are trade-offs in life. Those mulling model portfolios may want to consider the following issues of time allocations highlighted by Williams.

“Advisors currently spend 23% of their time on portfolio management, while only spending 15% on client-facing activities and 11% on prospecting for new clients,” she adds. “This presents advisors with a disconnect to their business goals since client-facing activities and prospecting for new clients are regarded as some of the most important aspects of growing an advisory practice.  Yet that time is limited if it is spent on portfolio management.”

Think about the above quote this way. An advisor can spend plenty of time effectively managing investments, but if client-facing and business-boosting activities are neglected, all that effort spent managing portfolios could be for naught.

Model Portfolios Aren’t Perfect, But Good Outweighs Bad

Indeed, model portfolios may not be suitable for everyone of a practice’s clients and the larger a client roster is, the more likely that statement is to be true. Still, there’s no denying proper time management can help a practice grow its top and bottom lines.

“Deciding to outsource is a big decision. Model portfolios may not be suitable for every client in every practice, but they can generate economies of scale and the capacity to help meet practice-wide goals,” concludes Williams. “Reallocating resources toward activities that are more closely aligned with business goals can empower advisors to add more value. And due diligence to identify the right partner provider is critical in order to meet these goals and, just as importantly, to meet client goals.”

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