Investors who use model portfolios are more confident in their own finances compared to those who do not, according to new research published by Boston-based Natixis Investment Managers.
Using data compiled from three separate surveys, the firm published information on the impact model portfolios have on the industry from the perspective of wealth managers, advisors, and clients.
Of 750 American-based investors with at least $100,000 in investable assets, 36%, or 270 investors, were in model portfolios, while 44%, or 327 investors were not, according to the Natixis research. The level of confidence in a person’s finances were greatly impacted by whether or not they were in a model portfolio.
For instance, 45% of those in model portfolios expressed confidence while only 24% of those not in models expressed confidence, the study found. The level of trust an investor has in their advisor is also indicative of their investment in a model portfolio.
Of those in model portfolios, 97% said they trust their advisor in making financial decisions as opposed to 73% who are not in model portfolios who said they trust their advisor on financial decisions.
Dave Goodsell. executive director at the Natixis Center for Investor Insight, said the reason for the discrepancy has to do with the time clients get to spend with advisors, who are not exerting extra time managing assets.
“It’s a systemized process [and advisors] have more time to talk to clients about what’s going on in their portfolio,” he said. “It’s probably a more comprehensive relationship than if you’re relying solely on the investment conversation.”
Model portfolios also present an advantage to advisors as well. As they are pressured by clients to provide financial planning services, model portfolios can help make their jobs more efficient so they can dedicate their time to addressing those issues that matter the most to clients.
“The people who are in models, what they’re looking for is a more comprehensive financial planning relationship from their advisor,” Goodsell said. “This feeds into the idea of ‘I have to deliver more than just a portfolio to clients; I have to deliver a really comprehensive financial planning relationship of which that is one critical part of it.”
Model portfolios may also help advisors in growing their business. In a 2022 survey, advisors said they plan to grow their business by more than 14% per year through 2025. To do that, they will need to bring in about 10 new clients per year.
To achieve that goal, advisors need to focus significant time to prospecting for new clients, however the same survey of 300 U.S. financial professionals and advisors, found that only 9% dedicate their time to prospecting. Meanwhile they spend 27% of their day managing their clients, 25% meeting with clients, and only 15% of their time managing client investments, the study found.
When an advisor uses a model portfolio for their client’s assets, it makes it easy to manage those assets, which in turn can help make those client meetings run more efficiently. That give the advisor more time to address other matters including prospecting.
“If you’re using a model portfolio and customizing to some point, you have an ability to have a pretty consistent meeting with clients,” Goodsell said. “When you’re talking about investment performance, you understand what the parameters are and you’re more talking about how you would customize things in your portfolio.”
The increased use of model portfolios is coming at a time in the industry when clients are seeking more from their advisors, according to Goodsell.
“At a time when the industry is trying to move toward a more financial planning-based model, a more comprehensive service, models are proving a way to make that happen by opening up new opportunities for advisors to meet other client needs, to give them a more holistic relationship and they’re more confident about what they’re doing,” Goodsell said.
On the fund provider side of things, Natixis research found that two of the main reasons firms use model portfolios is because they can mitigate risk and add an extra layer of due diligence.
