COVID-19 is likely to make financial advisors more reluctant to adopt third-party model portfolios, and has boosted their confidence in their own investment strategies, according to Chicago-based investment research firm YCharts.
According to the “Advisor Sentiment Survey: Coronavirus, Third-Party Models & In-house Portfolio Management,” which YCharts released Wednesday, among advisors who added third-party model portfolios over the past year, 41% said they are “less comfortable” with the option, while about a quarter of all advisors who currently use them said they are planning to reduce their clients’ asset allocations to the outsourced portfolios.
Among advisors who rely on their own in-house portfolios, over half signaled that the pandemic did not change their beliefs in their strategies, while 42% said COVID-19 boosted their confidence in their own portfolio management.
YCharts CEO Sean Brown said that the abrupt end to the 11-year bull market caused by COVID-19, though quickly rebounding, clearly caused a stir with many advisors and their clients.
“Advisors are likely less comfortable outsourcing their portfolio management after COVID because the ensuing crisis likely led to many tough conversations with clients about the impact of volatility on their portfolios,” said YCharts CEO Sean Brown in an interview Tuesday.
Of the 300 financial advisors nationwide whom YCharts surveyed, 79% said that investment management and research is still a big part of their value proposition. Thus, “having portfolios managed in-house would enable advisors to be more flexible with client assets and have a greater understanding of their underlying strategies to be able to effectively communicate with clients about their investments,” Brown said.
In addition, Brown noted that “just like any other investment, there was definitely a loss of comfort during the COVID selloff.” Like mutual funds, he said, “you are investing in a mixed bag of securities, so at times of volatility, you might question the model that you are invested in and if it was the right model for your risk tolerance.”
But because these portfolios are more about helping advisors set up their clients with the right risk appetite than trying to outperform the market or a benchmark, said Brown, they are useful tools for some.
Model portfolios are baskets of securities that financial advisors can use to outsource investment management for their clients. They are usually offered by asset managers and involve building portfolios using the ETFs or mutual funds managed by their firm. Model portfolios can be comprised of stocks, funds, bonds or any other investable asset that investment managers or advisors have access to, and they are typically configured to meet specific risk objectives. They can also have specialty focuses, like ESG.
In recent years, third-party model portfolios have gained steam as advisors have begun to passively manage – or allow third parties to manage – their clients’ portfolios, so that they could spend more quality time with clients and dedicate and reach out to more prospects.
Morningstar’s 2020 Model Portfolio Landscape report points out that 400 model portfolios have launched since 2018, from firms including Blackrock, SEI Investment Management, Vanguard Advisers, Wilshire Associates and Goldman Sachs, among others.
According to a May 2019 report by Broadridge, 85% of advisors currently use model portfolios; 70% combine models and custom portfolio design; and 15% rely exclusively on models and custom portfolios. In total, Broadridge found, 54% of advised assets were in model portfolios.
Still, the proliferation of model portfolio options has left some advisors shaking their heads. More than half of the advisors YCharts surveyed, or 52%, complained that their toughest challenge is their inability to adequately compare one provider to another.
In addition, almost half, or 44%, of respondents said providers were too “one-sided” in their depictions of their portfolios.
