Advisers Increasingly Using Model Portfolios

Advisers are increasingly turning to model portfolios, according to a new report from Broadridge, “Distribution in a Model-Driven Age.” Home offices like them because they permit them to have greater control over investment processes, helping to boost performance and improve asset retention. This gives investors superior investment management at a comparatively low cost, and for advisers, offloading investment management responsibility frees them up to strengthen customer relationships and grow their business.

Today, there is $1 trillion in model portfolios and more than 10,000 different models in the market. Between 2016 and 2018, the compound annual growth rate of retail portfolios was 21%, but the growth rate of model portfolios was 37%.

Most financial advisers, 70%, rely on a combination of model and custom portfolios. Only 15% rely exclusively on model portfolios, and only 15% do the same with custom portfolios.

More than half, 54%, of advised assets are in model portfolios. Advisers say model portfolios are efficient for business growth for the following reasons. Ninety-one percent say they give them more time for client-facing activities. Eighty-three percent say they give them more time for financial planning, and 78% say clients care more about planning service and support than they do about outperforming the market.

The top five reasons advisers say they use model portfolios are: business scalability, the ability to leverage investment management expertise, the ability to focus on client acquisition and retention, being in a better position to address compliance and regulations, and having more stringent manager due diligence.

Broadridge’s report notes, “It’s not easy for advisers to balance business development with portfolio management. Rather than analyzing every position, a growing number of advisers rely on models to manage assets, so they can focus on client building and retention strategies.”

Ninety-three percent of advisers who use model portfolios are happy with this decision, and 91% say they give them more client-facing time. Advisers view models as the preferred method for clients with lower assets under management (AUM), with 73% saying they are the right approach for those with less than $500,000, 46% saying this is the case for clients with $500,000 to $999,000 in assets, and 31% saying this is the case for clients with $1 million or more. Broadridge says asset managers could change this trend by creating more sophisticated models that could attract higher-end investors.

However, advisers do have some concerns with model portfolios. Fifty-one percent say they make it harder to differentiate themselves from self-serve and robo-advisory options. Forty-six percent say they do not work well in down or volatile markets, 45% say it is harder to assess risk with models versus custom portfolios, and 35% think their clients might think them lazy for using model portfolios.

When building model portfolios in-house, 74% of advisers turn to asset managers, followed by Morningstar (65%), in-house proprietary tools (55%), BlackRock Aladdin (26%), Riskalyze (15%), Zephyr (15%), Internal CIO (13%), Dorsey Wright (13%), Zacks (6%) and Envestnet (6%).

Asked what the top five most useful resources asset managers supply them, advisers said websites, internal/external wholesalers, investment guidance from portfolio specialists, email correspondence and white papers.

Broadridge’s findings are based on a survey of 500 advisers conducted in March and April.