Heightened market volatility may temporarily slow outsourced portfolio construction

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The growing trend of advisers outsourcing portfolio construction is likely to slow in the short term as advisers seek to re-assert control over client portfolios in times of market volatility, according Cerulli.

Advisers have increasingly turned to outsourcing portfolio construction as a means to scale their businesses. During the past five years, the percentage of insourcers, advisors who either construct an individual portfolio for each client or construct models at their practice and then make changes on a client-by-client basis, has fallen 7 per cent. In some channels, such as national and regional broker/dealers (B/Ds) and independent registered investment advisors (RIAs), the drop has been even more precipitous, with the percentage of insourcers falling 20 per cent and 18 per cent, respectively. 

“Outsourcing to a professional, be it a third party or the home office, can deliver better, more consistent investment outcomes for clients of these practices,” says Matt Belnap, senior analyst at Cerulli.

Despite this change, early indicators show that the pandemic may interrupt the recent shift toward an outsourcer model. According to Cerulli research, nearly two-thirds (62 per cent) of respondents indicate no meaningful change in advisor discretion post-pandemic, while a significant minority (29 per cent) report that advisors are seeking greater discretion over client accounts. Only 9 per cent indicate that advisors were more willing to outsource a few months into the pandemic. In times of market uncertainty, advisors seek to retain control of investment decisions. 

“It’s easier for the advisor to make portfolio changes, and show the client that they are doing something, rather than having to explain why the home office or model provider is taking a ‘wait and see’ approach and that the advisor has limited ability to alter the portfolio in times of crisis,” adds Belnap.

Over the long term, however, Cerulli believes asset managers should expect outsourcing to continue, and that the development of this trend is one from which both advisors and clients can reap the benefits. 

“Constructing practice-level portfolios, or a personalised portfolio for each client, takes massive amounts of time for activities such as investment research and manager due diligence. Advisors who can move beyond portfolio construction and security selection as their main value proposition can use this time to grow and scale their practice, more efficiently servicing clients they already have, and attracting new ones,” says Belnap.

Looking ahead, Cerulli believes that the locus for product decisions will increasingly be made outside of the practice. “In light of this trend, firms should allocate their resources and distribution focus accordingly,” concludes Belnap.

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