Most financial advisors’ practices build and rely on their own custom portfolios for clients even though the vast majority of them are ill-equipped to do so, according to a recent report by Cerulli Associates.
As much as 62% of advisors, or 55% of all practices, rely on their own investment research and portfolio construction. Cerulli estimates that only 7% of those are capable of doing that effectively.
Financial planning and a focus on holistic wealth management advice are increasingly what advisors preach. But they continue to maintain their investment processes. Advisors believe it is a core part of their value proposition and are hesitant to outsource investment management, according to Cerulli.
A mere 12% of advisors outsource investment management entirely and only 38% rely at all on model portfolios created outside their own practice, according to an August report.
Financial advisors in the U.S. have leaned on domestic stocks and bonds to build portfolios, potentially risking too much and leaving returns on the table. Putting investing acumen aside, an eye-popping 93% of advisory practices just don’t have the people to adequately select and monitor investments, Cerulli said.
It’s hard to argue there aren’t trade-offs when an employee splits their time across different responsibilities, whether those are investments, financial planning, or the ancillary tasks of running a business.
The average team with potential to effectively create custom portfolios for clients has on average nine people, according to Cerulli. Those practices capable of bespoke investment solutions are often supported by a centralized investment group. Advisors who don’t have that support should rethink their investment management, Cerulli concludes.
“The team-based investment analyst or CIO function is so critical that it is a prerequisite for Cerulli to trust that the practice can construct and monitor customized portfolios without external assistance,” the report says.
In larger organizations, it’s possible that centralizing investment management entirely across advisory practices will ruffle feathers.
Advisors who feel a limited menu of investments or constraining portfolio models are hindering their growth might leave to join a new firm – it’s a haunting problem keeping wealth management executives awake at night.
