While the share of AUM financial advisors allocate to model portfolios has risen modestly in the past few years, there has been a significant change in how advisors use the models, according to the Model Portfolios: Adaptive Solutions for Portfolio Growth report from State Street Global Advisors, the investment management division of State Street Corp.
State Street findings show that only 4% of the advisors the firm surveyed do not use model portfolios today, according to Brie Williams, global head of advisory solutions and wealth intelligence.
“What I think is a big takeaway based on the findings and looking at this over a five-year progression is it’s no longer a question of whether advisors are using models in their practice, it’s how much they are using them,” Williams said.
“There are really three key challenges financial advisors are looking to tackle—the commoditization of financial management, so they have a means to differentiate their value beyond custom portfolio creation,” she said. “There is client expectation for more comprehensive personalized advice. Obviously, portfolio performance is central, but they are looking for a holistic package for the outcomes they seek to achieve. And the last thing is the use of technology and technology as it relates to models certainly helps create flexible dynamic solutions to meet the changing needs the market demands.”
According to the advisors surveyed for the study, they are allocating about 39% of their total AUM to model portfolios today, up 7% from three years ago. At the same time, State Street found that U.S.-based investors who had assets in models were more satisfied with their financial advisors than those who didn’t. For example, 93% of investors with allocations to model portfolios said their advisor understood their financial goals vs. 79% of investors who had no such allocations. Ninety-two percent of investors with assets in models said their advisors provided useful financial advice vs. 83% of all investors surveyed. Investors who had assets in models were also more likely to feel that their advisor was optimizing the performance of their financial portfolio at 81% compared to 70% of all investors who felt that way.
U.S.-based investors with assets in models were also happier with the fees they were paying their advisors. Seventy-nine percent said they were satisfied with the fees in relation to the value of the service provided. Only 56% of investors who had no assets in model portfolios were equally satisfied with their fees.
Slightly more than half of advisors (54%) now build their own custom models, while 53% use third-party model providers and 45% rely on their home office or broker/dealers. For those who use third-party providers, TAMPs were the most popular choice at 88%, followed by asset managers (76%).
For their part, the majority of U.S. investors (63%) have expressed the sentiment that they don’t care if their advisor uses a self-built model portfolio or one provided by a third-party provider as long as they are getting comprehensive financial planning services. However, 70% of investors cited a lack of individual tailoring to a client’s specific situation as the main drawback regarding the potential use of model portfolios.
“As it relates specifically to client-centric value, that’s the advisor practice moving from looking at models as pure operational support to an enhanced value proposition,” said Williams. “It really redefines them as relationship-based, allows them to shift their time to be focused on delivering personalized, holistic outcomes and that allows investors, when they measure the value of what they are paying for, to see this relationship beyond performance metrics based on the portfolio and really look at the holistic opportunity that the relationship brings. Am I achieving the liquidity needs, the longevity needs, and the legacy needs that are on my living will journey?”
The share of advisors who rely on core models declined by 15% since 2019. Instead, most advisors either modify their models on a client-by-client basis (30%) or create custom models based on the client’s assets (49%).
Today, the majority of advisors (78%) prefer investment objective completion models, another 69% use target risk models and 61% outcome-oriented models. Less than half (45%) use target-date models.
What advisors value most when choosing a partner for model portfolios has also changed. In 2019, 19% of those surveyed indicated it was “performance.” Today, that number has fallen to 29%. Instead, 30% of advisors value “commitment,” 27% value “price,” another 26% value “communication,” and 25% value both “talent” and “transparency.”
When evaluating model portfolios, 45% of advisors rely on data providers such as Morningstar Direct and Bloomberg, while another 43% look at financial publications. About 40% of advisors use investment consultants to help them determine which models to use and 38% look at model provider websites. Other sources of guidance include professional organizations (36%), independent platforms (30%), in-house investment teams (22%), broker/dealers (21%), colleague recommendations (15%) and wholesalers (13%).
State Street Global Advisors completed the study between March and May 2024 in partnership with A2B Planning and Prodege. The study included interviews with SME providers in the U.S., an online survey of 200 U.S.-based financial advisors with at least $25 million in AUM and eight interviews with U.S. financial advisors who have at least $25 million in AUM.
