At BlackRock, we hear some resounding themes from thousands of advisory teams across the industry. They want to simplify their businesses, save time and grow faster. While some advisors are successfully evolving their businesses, others feel stuck because they can’t find the time to focus on growth. This frustration bubbles up most frequently in our conversations with teams who build custom portfolios for their clients.
Building portfolios is time-consuming work. Setting a benchmark, budgeting for both cost and risk, performing due diligence and ongoing monitoring – while striving to outperform – leaves little capacity for the activities that drive business growth.
Many advisors have tried to play the dual roles of portfolio builder and business builder, but there are only so many hours in a day. It’s a constant challenge to be effective at both, especially during times of market stress when it matters the most. Thanks to innovation in the asset management industry, there is a solution to the portfolio builder’s conundrum.
There used to be only two ways advisory teams could provide portfolios to their clients. They could either do all of the work themselves or do none of the work (i.e., outsource investment decisions entirely to home office or third-party models). But that is no longer true given the advent of custom model relationships where you decide which portions of the portfolio design process you want to control and which parts you want to outsource.
We’ve seen many advisors simplify their investment process by transitioning smaller client accounts to ready-made model portfolios and lightening the load in larger accounts by creating custom model portfolios.
If portfolio building is a core part of your service offering, keep doing it, but make it easier by engaging an experienced model customization partner who offers extensive research capabilities and advanced technology. You can save a significant amount of time on research, due diligence, or other activities you choose to outsource, which can make a big difference in the long-term growth of your business.
If you’re questioning the way you use your time, estimate the monetary value of the time you spend working on portfolios and measure that against the opportunity cost. Start by looking back at the past four quarters to answer these questions:
Now, take a look forward. For the sake of simplicity, let’s say you currently have $100 million in assets under management (AUM), and you plan to focus on managing that money instead of bringing in new client assets. After 20 years, if your portfolio performance matches a moderate benchmark return of 5%, you will end up with $265 million in AUM. If you outperform the benchmark by 1% every year, you will finish with $320 million, and if you underperform by 1%, you will finish with $219 million.
Alternatively, if you simplify your investment process and bring in $5 million of new client assets each year, your AUM would be $430 million after 20 years – even if your portfolio performance matches the benchmark. Consider what that will mean for the value of your business when you retire or if you decide to sell your business to another advisor.
Bringing in new clients can have a bigger impact on AUM growth vs. outperforming
Hypothetical AUM growth with 5% annual benchmark returns
If you still think you want to build client portfolios from soup to nuts, consider a couple more questions:
Investment performance is not a significant driver of client satisfaction
% of satisfied clients who cite factors as their reason for satisfaction
Source: Cerulli, “U.S. Advisor Metrics 2023.”
We’ve heard numerous success stories from advisors who have simplified their investment process. Here are six ways they’ve redeployed their time to move the needle on their business growth goals.
1. Joining meetings with prospects. When wealthy families consider moving their assets to a new advisory firm, they want to know who would be overseeing their money. Your credentials can help prospective clients feel comfortable entrusting their assets to your firm.
2. Building their own book. Portfolio managers who periodically join their peers in client meetings for a number of years sometimes realize that they enjoy interacting with clients. Giving up the steadiness of a fixed salary for a recurring revenue can be uncomfortable but for some advisors, the risk is worth the potential upside.
3. Solving complex problems for wealthy families. Many advisory teams tell us they want to grow their business without adding a lot of new households, and that requires upscaling their target prospects. Advisor competition for high net worth and ultra high net worth clients is intensifying as wealth has become increasingly concentrated upmarket. Clients with a net worth more than $5 million control roughly 47% of investible assets in the U.S. today, up from 27% in 2010.1 If you want to attract high net worth clients to your practice, you will need to show them that you can address their complex needs relating to tax minimization, philanthropy, intergenerational family dynamics, selling businesses and generating income from illiquid assets. Portfolio managers are using their analytical minds to master these new domains and turn that knowledge into practical solutions for wealthy families.
4. Educating their teams to better serve high net worth clients. High net worth clients want to know that their portfolios are benefiting from the latest investment strategies to help them increase their wealth on an after-tax basis. To help clients understand your investment strategies, your team needs to be prepared to explain in plain language how certain vehicles are designed for specific purposes, such as buffering volatility, providing alternative sources of diversification or return amplification, reducing taxes and unwinding concentrated holdings, and seeking tax-efficient or values-aligned investing. Educate your team on your investment strategies and share ways to explain them in a way that clients can understand.
5. Integrating merged or acquired practices. Cerulli estimates that advisors looking to move firms represent a total AUM exceeding $500 billion, and another $2.3 trillion of AUM sits with advisors expected to retire within the next 10 years.2 The economics of M&A can be impressive, but integration can be challenging, particularly with respect to cultures, branding and investment processes. Transitioning an investment team from one platform to another isn’t easy. Asking a team to figure it out on their own usually leads to frustration and unhappiness. If you decide to purchase another firm, you will need to dedicate a significant amount of your time to ensure a successful M&A transaction.
6. Being the voice on markets and portfolios. The bigger the firm, the more challenging it is for everyone to be on the same page when communicating about markets and portfolios. With so much data and so many sources to synthesize, advisors report that they’ve struggled to align their communications to clients. Portfolio managers are stepping in to lead their firm’s messaging through articles, videos, social media and events to help their teammates and clients separate meaningful market signals from noise. Having one clear voice helps with building your firm’s brand and your clients’ trust.
Whether you decide to build portfolios yourself, customize model portfolios or buy model portfolios off the shelf, BlackRock can help. Ask your BlackRock Market Leader or explore our online resources to learn how you can simplify, save time and grow your business.
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