More than 16% of financial advisor practices are using asset allocation models as their primary portfolio construction process. Should advisor practices continue to adopt model portfolios, as industry trends would suggest, Cerulli estimates the near-term addressable opportunity at $2.1 trillion—nearly 9% of advisor assets—by year-end 2020. Capturing advisor assets, however, will require model providers to confront the barriers to expansion with a long-term approach to strategic distribution and advisor education, according to Cerulli’s latest report, U.S. Asset Allocation Model Portfolios 2020.

The benefits of model portfolios—scale and consistency of client outcomes—free up advisors to focus on strategic areas of business growth (e.g., client acquisition, holistic wealth management). For broker/dealers (B/Ds), asset allocation models offer more consistent investment performance across advisor affiliates, easing the burden of compliance oversight catalyzed by regulatory requirements. “The efficiency and time savings gains are clear,” according to Brendan Powers, associate director. “Model users report spending 8.5% of their time on investment management activities. In contrast, advisor firms that manually create portfolios (insourcers) commit an average of more than 17% of their time on investment management, while spending 9.5% on both financial planning and prospecting new clients.”

Increased market volatility due to the COVID-19 global pandemic could accelerate model adoption. While some advisors will look to bring the investment process closer to the vest, Powers believes the outbreak will cause many advisors to reconsider their role in the investment management of their clients’ assets. “Due to the sheer size, scale, and speed of the decline and corresponding volatility, many advisors will need to reinforce their client-facing time to retain assets. This could result in broader interest in and adoption of asset allocation models.”

Of the top-five channels that providers should seek to target, 80% or more of model providers indicate that managed account tech providers and independent B/Ds represent the greatest opportunity over the next three years. There is also increasing optimism about the prospects of larger B/Ds, including the wirehouses. However, achieving shelf space will be a hurdle for many providers. According to the report, 90% of model providers cite access to key platforms as a challenge. Platform shelf space is monopolized by the largest model providers, which can bring to bear investment capabilities alongside vast resources that allow them to engage with a broad audience of individual advisor teams. Engaging advisor practices is essential because advisors have ingrained investment management into the fiber of their value-add, and therefore will be hesitant to fully offload these responsibilities. Capturing advisor-managed assets will require providers to create thoughtful engagement strategies that target due diligence teams and focus on advisor education.

To expand strategically, Cerulli recommends that model providers define how models are going to fit within their firm’s overall distribution strategy, with specific consideration given to organizational structure, staffing, and training. This sets expectations for the organization and helps determine appropriate resource alignment. Once this is established, distribution teams should gain an understanding of the advisor mindset, the advisor practice’s ecosystem, marketplace access and competition, and model due diligence. “While it will take several approaches and a long-term time horizon to cajole advisors who should be outsourcing portfolio construction to use models, model providers need to begin to position themselves for that future,” Powers concludes.

[1] Cerulli identifies a hypothetical increase in total addressable market of $7.6 trillion in 2020E assets, with 53% of financial advisors identified as model targets. This best-case scenario assumes all advisors who should be using models based on their own practices’ capabilities are actually using models.