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.

By DJ Shaw



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

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.

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