How outsourced investment strategies are reshaping wealth management

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Model marketplaces can help advisors on multiple fronts, but only if they move on from the world of Excel spreadsheets and the rep-as-portfolio-manager model.

The industry’s movement to fee-based business and new technologies have fed the growth of the model marketplaces, but the outsourced strategies have only just begun to make their full impact, according to experts who spoke Wednesday on a panel at SourceMedia’s In|Vest conference in New York.

Model platforms carry a great deal of potential for altering the relationship between broker-dealers and asset managers, boosting inflows to ETFs and allowing financial advisors to adjust their value proposition while spending more time with their clients, according to the panelists.

The marketplaces give advisors a selection of third-party investment models while using rebalancing software to control their clients’ trades in bulk. Asset managers and tech platforms offering the marketplaces are seeking a share of the roughly $2.7 trillion invested through other kinds of models, according to Hollie Fagan, BlackRock’s head of RIA and retail investor platforms.

About $2 trillion remains in rep-as-PM models, while home-office models offered by BDs have about $500 billion and traditional asset manager models have some $150 billion, she says.

Fintech is driving many of the changes, said Michael Kitces, director of wealth management at Pinnacle Advisory and co-founder of the XY Planning Network.

“At some point in the past relatively few years, we seem to have gone through this shift where the technology of the asset manager side has become so connected to the technology of the advisor side,” Kitces said.

“Now, all of a sudden, distribution channels are not defined by the wirehouse, IBD, insurance BD or RIA,” he continued. “The technology companies are becoming the distribution channels. The technology platforms are the new distribution channel instead of traditional distribution channels, because we’re all becoming channel-agnostic.”

BlackRock, for example, launched its first model portfolios around 2012, Fagan says. Since then, the firm’s platform has attracted some 30,000 subscribers who access its models, roll theirs over, assess risk and report results to clients, she says.

The firm sees models as being in the “very early innings” of their development and impact, Fagan said.

“We believe that, much in the way that fee-based was an accelerant to our ETF business, models too will be an accelerant to our ETF business,” she said. “There are lots of other advisors that are sort of doing it themselves, and not everybody’s going to come where we are. So we need to put our models out, in any type of venue, put them on all the shelves in places that advisors are going to visit.”

Automated models, therefore, can free advisors up to do “other, higher-value things with their clients,” she added.

Lower-value activities that currently take up time include the manual maintenance of Excel spreadsheets to track a client’s holdings in their advisors’ own models, says Morningstar CEO Kunal Kapoor. Excel remains the No. 1 tool used by advisors who offer investment management as their main value proposition, he said.

“You see the stresses that these advisors are under. And this is a pretty neat technology solution for those folks to start to move over and maybe move away from the Excel world that they’ve lived in,” Kapoor said.

“They’re simply not doing the job they should be doing,” he continued, “which is helping their clients achieve the outcomes the clients want, and instead they’re in the back office doing work that, to them, seems inexpensive because they haven’t paid much for it.”

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In addition to the time spent on such tasks, rep-as-PM advisors should consider their succession plans. Advisors with smaller practices often point to their decades-long success as investment managers, according to Estee Jimerson, the head of asset manager distribution and engagement at Envestnet.

“It’s working fine for you, and why would you change? The reason you would change is because you want to sell your practice,” Jimerson said. “And the valuation on your practice is going to be a lot higher if you’re not the only person able to buy and sell an asset allocation, especially if you can outsource that to a third party, where you have a more predictable performance record.”

Kapoor sees the rising adoption of modeling in the future as leading some larger shops to move in the opposite direction into the asset management space. Advisors have already started making so-called models of models, said Natalie Wolfsen, the chief solutions officer at AssetMark.

“Advisors are putting models together to construct portfolios that meet their clients’ specific needs. And so we’re really investing in the technology and the tools to help them do that,” Wolfsen said, noting the customized models pose challenges for BDs.

“How do you have enough information about how your advisor’s going to be selecting models or building models of models so you can be comfortable that they’re doing the right thing for the client?” she asked. “So, technology really needs to pick up there. We need to help broker-dealers with that.”

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Asset management Portfolio construction Succession planning Fintech Michael Kitces Kunal Kapoor BlackRock Envestnet Morningstar AssetMark In|Vest Conference