Building a Model vs. Outsourcing: How Advisors Manage Your Investments
When you hire a financial advisor, one of the most important, yet often overlooked, differences between advisors is the vehicles they use to manage your money. Some advisors choose to pick stocks and manage investment portfolios themselves. Others outsource the investment management to third-party investment vehicles to handle the day-to-day decisions. Both methods can be effective, but the process, costs, and level of customization can vary significantly.
Building a Model In-House
When an advisor builds a model portfolio themselves, they are taking on the role of portfolio manager. They take the research, stock selection and balancing in-house to select the specific investments that make up each model. The advisor monitors performance, makes allocation changes when markets shift, rebalances accounts regularly, and may perform tax-loss harvesting to improve after-tax returns. This could include a mix of ETFs, index funds, actively managed mutual funds, or individual stocks and bonds.
Pros: approach is extremely hands-on, and in theory, would give advisors more flexibility to tailor the portfolio to each client’s goals, tax situation, and preferences. This is also more cost-effective as the fees on outsourced funds can be high.
Cons: While this approach offers full control, it requires significant time, market expertise, and ongoing research that many advisors don’t have the resources to do. The advisor is fully responsible for every investment decision, which can make scalability challenging as the client base grows.
Outsourcing to a Manager
In an outsourced approach, the advisor entrusts investment selection, trading, and rebalancing to a professional money manager, mutual fund company, model portfolio provider, or Turnkey Asset Management Platform (TAMP). While the advisor remains responsible for determining the most appropriate overall strategy for each client, considering factors such as time horizon, risk tolerance, and long-term goals, the ongoing, day-to-day portfolio management is handled by the outside provider.
This allows the advisor to focus more on holistic financial planning, such as helping clients with tax strategies, estate planning, retirement projections, and other big-picture goals, while still offering access to a professionally managed portfolio. Outsourcing can also bring institutional-level research and investment strategies that would be difficult for a single advisor to replicate on their own.
Pros: Access to institutional-level knowledge, resources, and insights. Many top portfolio managers regularly meet with executives of major corporations, giving them perspectives and information that a smaller portfolio manager might not have. This approach also frees up the advisor’s time to focus on comprehensive financial planning and relationship management, while still providing clients with sophisticated strategies and a consistent, disciplined investment process.
Cons: The trade-off is less portfolio customization, since the advisor is working within the parameters of the selected model, and potentially higher costs because of the added management layer.
Why Choosing the Right Advisor Matters
There is no right or wrong answer when it comes to choosing investments, it’s about finding the right fit for your needs. Some clients want a hands-on portfolio manager who builds and adjusts investments specifically for them. Others prefer an advisor who focuses on comprehensive planning and partners with professional managers for the investments.
Financial Fit can help you understand the differences between financial advisors and their investment philosophies to help you make the right choice for your future. Click the button below to talk to an experienced consultant who can help you determine which financial advisor and strategy is the best fit for you.