Market volatility is not new, but it’s still tiresome for advisors. It’s not enough that your clients often require more attention during volatile markets, but their portfolios do, too. Time never feels so strapped as when the markets take investors for a ride.
One place advisors are turning for time relief is model portfolios. These customizable portfolios outsource the heavy lifting of investment management so you can focus on what really matters: your clients. They let you scale and simplify your business so you can deliver a more consistent client experience.
We spoke with Eve Cout, head of the model portfolio pillar within BlackRock’s U.S. Wealth Advisory business, to learn about the benefits and drawbacks of model portfolios, and where the future of the model portfolio industry may lie. Here are edited excerpts from that interview.
What are model portfolios?
The idea of providing investors with “whole portfolios,” allocated and managed across asset classes, isn’t a new one. Balanced mutual funds have been around since the 1970s, and target-date funds have seen explosive growth since the early 2000s.
Model portfolios occupy a unique place within this landscape. The term, broadly speaking, refers to prefixed asset allocation portfolios, typically diversified across 10 to 12 holdings and built with exchange-traded funds, active mutual funds or some combination of both. They’re generally created by financial advisors, wealth managers and asset managers.
Models are just another iteration and innovation on that landscape that helps solve for key challenges advisors face, primarily the time crisis advisors face today to be able to offer more services such as holistic wealth management to their existing and new clients.
How has recent market volatility impacted advisor outsourcing?
We found that advisors who had adopted models were able to deliver a more consistent client experience with over 70% of financial advisors keeping their clients invested and aligned to their investment goals during the crisis.
The benefits of a models-based practice were evident during the market volatility and over 75% expect to increase their usage of models in the next 12 months.
What are the shortcomings or challenges for advisors when using model portfolios?
We’re still in the early inning of model adoption. One of the key challenges we’ve found is overcoming the inherent friction in model adoption, which can range from where to start implementing models to navigating the client conversation and, of course, the embedded friction within the models, including taxes and low-cost basis.
That’s why it’s important to surround the model with a convenient and easy experience to ensure you can drive adoption with advisors.
We have dedicated model specialists who partner closely with financial advisors to build a models-based practice, answering the key operational questions and how to start transitioning to a models-based practice.
What is the future for model portfolios?
In some respects, 2019 can be seen as the “breakout” year for model portfolios. Adoption has steadily increased. Nearly 63% of advisor assets are in some form of model, up from 50% five years ago and forecasted to grow to 71% in the next two years. Assets in advisor-managed models have reached $2.8 trillion, according to BlackRock estimates.
Just how big is the opportunity? Research firm Cerulli estimates there are $6.5 trillion in assets that could be addressed by models — more than double their current levels.
To double the market, we expect to see a much broader set of offerings than the traditional 60/40 core. Model portfolios may be breaking out, but as with every other aspect of financial and investment management, they will also have to evolve to reduce friction and meet client needs.
It’s with these trends and advisor demand that we are spending considerable time on building models beyond the core, applying a multimanager approach and creating models that cater to high-net-worth investors. For instance, we’re moving beyond the core asset allocation to help increase advisor adoption; for example, only 12% of the model universe has an income objective.
We found over half of advisors would not adopt a model comprised of 100% proprietary models. Models that employ multiple managers delivered at no overlay can prove to be the next leg of growth for asset managers within the core asset allocation category.
Also, over 60% of advisors are looking to use models with high-net-worth clients — creating a model where the advisor can leverage the scale and simplicity of a standard model, but offer individual stocks, bonds and overlay capabilities can help scale their approach to higher accounts or even extending to include alternatives.
We find advisors tend to use these solutions in three key scenarios: Outsource their small accounts to models, outsource a specific asset class or portion of the overall portfolio or outsource the core of the portfolio and spend their time on tactical tilts.
Our goal is to be the simplest way for an advisor to grow their practice. Model portfolios are just another way of delivering quality portfolio construction guidance to best serve advisors and deliver fiduciary value by building better portfolios.
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Q&A With Eve Cout of Blackrock on Model Portfolios originally appeared on usnews.com