SAN DIEGO — It’s OK to outsource your investment strategy — really.
Around 80% of advisors who completed Envestnet’s training program last year began to outsource their modeling. Those same advisors grew their AUM by 41% year-over-year, according to Estee Jimerson, head of asset manager distribution at Envestnet. Advisors from the program who didn’t outsource only grew their AUM by 18%, she said on a panel at the TD Ameritrade National LINC Conference.
Time is valuable — and advisors don’t always have a lot of it, she said. “It’s often times really difficult to be the chef, cook and bottle washer … One of those has to give.”
So how can advisors free up time? Investment strategy is a natural place to look first since it’s where advisors spend 40% of their time, said Kara Murphy, chief investment officer at United Capital, citing a 2016 Cerulli Associates study on advisor metrics. While portfolio management can be a huge time suck, it can also be a difficult place for advisors to differentiate themselves and stand out in their practices. “It’s really commoditized,” she said.
What sets financial advisors apart is what clients can’t get elsewhere: Advice and relationships. Exerting excessive effort on investment strategy can take up too much time, the panelists said.
“The nature of the services [and] the engagement clients want and need goes way beyond investments,” said Martin Small, head of U.S. iShares at BlackRock. He adds: “I think as this industry has moved more to comprehensive wealth management instead of picking stocks and bonds, it has really pulled people to models.”
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Chris Purves is president of Greenfield Insurance Agency, which offers insurance programs for both for-profit businesses and nonprofits. With an understanding of the unique challenges faced by small businesses, Purves enjoys servicing these companies and offering coverage to help through uncertain times. Greenfield Insurance provides coverage for general liability, property, workers comp, directors and officers, cyber liability, employment practices, professional liability and more.
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Mike Capelle, co-founder and CEO of Modern Wealth Management in Monterey, California, is in charge of the tech stack at the $6.1 billion AUM firm.
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Traditionally, flows into advisors' models have been stronger than flows into models built by asset managers at Envestnet. That has flipped over the past few months, said Jimerson.
One factor preventing advisors from outsourcing is the idea that they are losing control of the portfolio.
“Outsourcing does not mean 'Don’t pay attention,'” Small said after the panel in an interview with Financial Planning. “It does not mean 'Forego oversight and control.'”
Advisors still need to understand the strategy behind their clients’ portfolios — they just don’t need to manage them themselves, he says.
Additionally, advisors should customize models to be tailored to their clients’ goals, according to Murphy. “It becomes much more meaningful when it’s embedded within the guidance process,” she said.
Advisors don’t necessarily have to outsource all their models. “They might decide that they run a 60/40 model perfectly fine, but they need help on income-oriented solutions or strategy-focused solutions,” said Jimerson.
Planners should also do due diligence to make sure they are thinking about more than just the model itself.
“The model is really the least important part that these asset managers are providing. It’s the resources that go into supporting that model,” Jimerson said.
It's necessary to look into details like asset manager brand, support for client communication and forecasting capabilities, according to Small.
Another hurdle for advisors could be a hard conversation with clients.
“Having to explain to clients why they are transitioning tends to scare advisors,” Murphy said.
One easy way to start the conversation: “Here is your portfolio that used to cost 1% that now costs 13 basis points,” Small said.
