Advisers are Adopting Technology, Model Portfolios

More practices are looking to upgrade their technology and implement direct indexing and model portfolios as they look to spend more time on client service.



More adviser practices are embracing technology upgrades, direct indexing, and model portfolios as they seek to spend more time on client service and business development, according to a recent report.

According to findings from “The Cerulli Edge―U.S. Advisor Edition,” when used appropriately, model portfolios can effectively free up time adviser practices spend on portfolio management, allowing them to reallocate that time toward other highly valuable functions, including the delivery of financial planning services and asset gathering

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One barrier many firms have faced as they look to increase efficiency is technology, with firms and advisers starting from different places, the report says. Technology stands to be a leading source of scale, client engagement, and employee recruitment—and in some cases, has a better competitive advantage than outright portfolio performance.

Advisers cite insufficient time (70%), compliance concerns (64%), and high costs (58%) as the most common challenges when managing and implementing technology into their practice, the report says. Advisers recognize the value of technology solutions, but often focus only on making the most necessary elements of the platforms part of their standard workflows.

According to Cerulli, 57% of distribution executives are prioritizing the enhancement of firm-specific digital experiences for advisers. They have plans to generate predictive sales analytics (74%), provide additional resources for wholesalers such as iPads or portfolio analysis software (57%), enhance their social media presence (43%), and implement artificial intelligence (11%).

“No longer can advisers and wholesalers rely only on in-person meetings with clients. They must enable a digital-driven experience enhanced by face-to-face interaction,” Cerulli says. “Effective use of technology signals to clients that a practice is prepared for the future. … New tools are being added to the toolbox, but human interaction and trust remains a vital component going forward.”

Portfolio Customization

Portfolio customization through direct indexing strategies has been a key priority for both asset and wealth managers, but few advisers have adopted them in their practices, the report says. As a result, an opportunity exists for advisers to differentiate through personalized portfolios mixed with tax 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 advisers because they are able to customize investments to fit with each client’s unique goals, objectives, and beliefs.

For example, if a client wants to exclude oil and gas stocks, they are able to do so, while the manager will work to deliver returns within agreed-upon variations to the target index.

The most popular customization among direct indexing strategies is taxes. Owning the underlying securities not only protects an investor from unwanted year-end capital gain distributions, but also allows the opportunity for targeted loss-harvesting strategies, the report says. A second widely applied use for direct indexing comes from values alignment through environmental, social and governance investing.

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

The Case for Model Portfolios

Many successful adviser practices are using model portfolios, allowing advisers the space to better serve their clients and develop their business, Cerulli says. For advisers looking to focus on other financial and advanced planning capabilities, the adoption of model portfolios should free up time.

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

Most adviser practices fall into the category of “insourcers” (68%), meaning they either customize portfolios on a client-by-client basis or use practice-level resources to build a series of custom models for use with their clients.

While insourcer practices spend 18.5% (practice models) and 29.5% (customizer) of their time focused on investment management, a model portfolio use allows advisors to reduce that time commitment to less than 10%, the report says. This saved time can be put toward client-facing activities, an important activity in building an immature practice.

Larger advisory practices will likely adopt the use of model portfolios for smaller client accounts with lower assets to allow advisers to spend more time focused on high-net-worth and ultra-high-net-worth clients, the report says. A model portfolio user’s average client size is $703,720, while the average size of a non-user is over $4.6 million.

Model portfolios will likely benefit typically younger advisers as they look to group their overall business by having more time to focus on relationship management, the report says. Younger advisers may also gain a competitive advantage in that they are able to service more clients than a more traditional, older adviser.

Millennials and Gen Z Wealth Rises 25%, Outpacing Gen X and Boomers

The growing wealth of younger generations brings more challenges – and opportunities – to the investing and retirement planning sector, according to a report from Cerulli.

 



Millennial and Generation Z financial wealth jumped 25% in 2021, a higher rate than their Gen X and Baby Boomer counterparts, according to Cerulli Associates.

Millennials (born between 1981-1996) and Gen Z (born between 1997-2012) saw their aggregate assets go from $2.9 trillion to $3.6 trillion, according to a new study by the Boston-based research and consulting firm.

The overall wealth of these cohorts was unsurprisingly much lower than Gen Xers and Baby Boomers ages 40 to 74. In comparison, aggregate assets for these generations rose about 16% in 2021 to a combined $51.4 trillion, according to the research. However, the quicker pace of growth of Millennial and Gen Z wealth shows that advisers must start addressing the increasing financial concerns of the younger generations, including home ownership, student loans, and saving for their own childrens’ educations.

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“To retain these investors long term, providers will need to provide timely input on these crucial subjects or face expected attrition as consumers seek more holistic wealth management advice,” Cerulli Director Scott Smith said in a statement.

Tech Savvy Investors

The report notes that Millennials are accumulating wealth by “seriously investing” in retirement accounts, while Gen Z investors are testing the water through brokerage platforms. How they get advice, however, is important in reaching them, with more of this generation getting financial advice over social media channels such as Twitter (39%) and Reddit (19%). That well outpaces the average use of Twitter (11%) and Reddit (7%) for all age groups, according to survey.

The younger generation is also tech savvy, with 45% of respondents saying they would be comfortable using an online-only financial services platform.

Wealthier young investors are, however, are still interested in human interaction when it comes to financial advice. About half (48%) of affluent respondents with investable assets of more than $250,000 say that “no human interaction” is the biggest drawback of fully automated online advice platforms, the survey found.

Gaining Share through Tech, M&A

Affluent investors among the younger generations are also seeking more investment advice than in the past as world events and market volatility drive concerns, according to the study. Between 2018 and 2022, Cerulli saw the need for investment advice among affluent respondents jump from 34% to 44%.

In order to compete, Cerulli says advisers must look to expanded service offerings through both technological advancement as well as increased services via mergers and acquisitions (M&A) among brokerages and robo-advisers.

“While services are crucial, particularly as larger asset managers acquire smaller outfits to build out their capabilities, attention on the client-facing side, particularly on growing marketshare and mindshare among Millennials and Generation Z, can’t be ignored,” Smith said.

The survey was conducted in monthly waves for the first six months of 2022. It had about 5,000 respondents representing affluent households with more than $250,000 in investable assets and near-affluent households with more than $125,000 in household income.

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