Advisory firms seeking to grow their business view asset allocation models as fuel for expansion, presenting a significant opportunity for asset managers that provide third-party models – if they can solve for distribution. Leveraging technology that stands out from the crowd can differentiate an advisor’s value proposition and provide scale to distribution that can drive growth.
The scope of that opportunity is large and growing. Cerulli estimates that there are $7.6 trillion in assets held with advisor practices that lack the staff or resources to efficiently manage portfolios.1 Appetite for more predictable revenue streams have also seen an uptick, according to McKinsey, with home offices now generating 75% of their revenue from fee-based accounts compared to 54% in 2016.2 In a separate study conducted by Natixis of investment decision makers (including advisors) responsible for the fund selection process at their organization, 30% said they would add third-party models to their firms’ platform within the next 12 months.3 In particular, according to the Natixis study, 64% of fund selectors said they see a need for models that will make it easier to implement ESG across client portfolios (and 61% of respondents said they need such specialty models to meet client demand).
Beyond typical investment performance priorities, the reasons for the move toward model portfolios by advisors are consistent across the Cerulli and Natixis studies: scale the business and serve more clients; create greater efficiencies and reduce risk for the organization; improve due diligence; and, create more time to work on non-investment related services such as taxes. Currently only 14% of model providers offer tax-aware versions of their models, despite 57% reporting frequent requests for tax optimization.4 Additionally, model portfolios can allow for greater product differentiation like blending index and active strategies – a top priority for 62% of model providers, according to Cerulli. On the flip side, the top concern cited in the Natixis study is uncertainty around providing customization to clients (41%). However, that challenge is being effectively addressed with sophisticated technology provided by certain asset managers – and creating a competitive edge for some advisors in the process.
Technology drives distribution models
One way advisors can achieve customization via third-party model providers is through BlackRock’s Advisor Center, which leverages risk analytics from the Aladdin® risk management platform.
“The Advisor Center, powered by Aladdin, was constructed with model portfolios in mind,” says Brett Sheely, Director, BlackRock, who oversees asset manager models strategy. “Not only are the BlackRock models on Advisor Center, but other asset manager models are as well.6 On Advisor Center, advisors can access certain insights and customization options – for example, portfolio analytics across performance, risk and cost, scenario testing, and tax evaluation. It also allows advisors to quickly create client-facing reports so advisors can have smarter, more in-depth conversations with their clients – and the manual work and risk modeling is essentially outsourced to the system.”
Technology drives customization, but it also enables enhanced distribution by positioning models in front of advisors so that in turn those models could be recommended to clients. For example, advisors are increasingly using technology to analyze portfolios to help determine how they can best engage a client. When an asset manager’s models are present in the technology used by an advisor, it could lead to more informed conversations with clients.
Collaboration is a key aspect of Advisor Center and BlackRock’s overall approach to driving distribution of third-party models provided by asset managers. For example, a third-party asset manager (that isn’t BlackRock) may have a model with allocations to iShares® ETFs. In some cases, according to Sheely, that manager can get their model(s) added to Advisor Center where it could be more easily accessed by advisors and be available for use with their clients’ portfolios. BlackRock also has the ability to support an asset manager with custom model solutions to help them create models, an exercise that is aided by open architecture used to analyze portfolios and determine the best fit for an asset manager, given the manager’s contractual instructions. A dedicated team at BlackRock will support such partners with educational content and training resources.
In short, says Sheely, “Through our technology, we’re helping asset managers find a way to get their message and models in front of advisors. BlackRock also offers iShares® ETFs that asset managers can use in their model portfolios as potential building blocks for their clients’ portfolios as well as a way to differentiate or access ESG [environmental, social and governance] exposures – an area of increased interest in recent years.”
Meeting ESG demand
The models space is also seeing innovation and new product creation related to the growing sustainability and ESG trends – and firms and advisors are looking for analytics and ways to engage clients about the space. For any single advisor to incorporate ESG considerations into portfolios on a case-by-case, name-by-name basis would be incredibly inefficient, to say the least – opening yet another window for asset managers who offer models that address ESG demand. A bonus for asset managers is that Advisor Center is powered by Aladdin®, which offers extensive transparency, data, and ESG analytics.
According to Sheely, one way model providers may want to consider addressing sustainable demand is by adding ETFs with ESG objectives paired alongside their traditional exposures. In addition, the use of ESG ETFs could help asset managers as they work to position their brand as a provider of ESG solutions. “Third party managers can look to us for help with their ESG allocations” says Sheely. “Perhaps they don’t have in-house sustainability exposure to a certain segment of fixed income or maybe the international equity market. These asset managers may look to iShares® ETFs to help with their ESG investment approach.”
Managers can provide advisors models that travel
There are many reasons why asset managers derive benefits from providing models to advisors, even in times of uncertainty. For example, during the period of Covid market volatility many advisors benefited from a models-based practice and experienced four times the amount of new assets compared to advisors who do not use models.6
Model Portfolios are still in the early stages and there’s ample opportunity for home offices and asset managers to help advisors with their practice management. In this environment, model providers can give advisors time they need to run their practice and engage with clients, and access to data and insights imbued with the intellectual capital of a prominent asset management firm. Models also provide some advisors with flexibility as their own careers evolve.
“ETF model portfolios can be a compelling combination for advisors: advisors leveraging model portfolios frees them to focus their time on building relationships with clients; an institutional investment process such as ours allows advisors to compete with larger financial firms; and ETFs are a useful investment vehicle for sophisticated, optimized model portfolios” says Robert Michaud, Chief Investment Officer, New Frontier Advisors. He also says the benefits of ETFs apply to model providers as well. “For asset managers, portfolio construction may benefit from using ETFs that have a sufficient track record, clear methodology, and efficiently target the given asset class and risk factors.”
“An independent advisor might work through a particular RIA firm or broker dealer today, but that very well could change in the future,” says Sheely. “When that happens, the advisor could take the model with them. In that sense, asset managers can play a greater role in providing full and lasting portfolio solutions to advisors and their clients through model portfolios.”
1 Cerulli, “U.S. Asset Allocation Model Portfolios,” 2020
2 McKinsey & Company “The value of personal advice: Wealth management through the pandemic,” 2021
3 Natixis, “Headed for the Light: 2021 Professional Fund Buyer Outlook,” 2021
4 Cerulli, “U.S. Asset Allocation Model Portfolios,” 2020
5 Services subject to availability.
6 BlackRock Models Survey, 2020. Survey Methodology Overview: In response to the COVID-19 induced volatility, during the week of 5/4/2020, BlackRock collected responses to a 15 question survey about wealth outsourcing (SMA & Models usage) experience and intentions from approximately 305 financial advisors across more than 10 independent and wire channel firms. The results are a snapshot of the data collected as of 5/11/2020.
Carefully consider the investment objectives, risk factors, charges and expenses of funds within the model portfolios before investing. This and other information can be found in the funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting each fund company’s website or calling their toll-free number. For BlackRock and iShares Funds, please visit www.BlackRock.com or www.iShares.com Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns.
Investing involves risk, including possible loss of principal.
The model portfolios are made available to financial professionals by BlackRock Fund Advisors (“BFA”) or BlackRock Investment Management, LLC (“BIM”), which are registered investment advisers, or by BlackRock Investments, LLC (“BRIL”), which is the distributor of the BlackRock and iShares funds within the model portfolios. BFA, BIM and BRIL (collectively, “BlackRock”) are affiliates. BlackRock is not affiliated with New Frontier Advisors, Cerulli, McKinsey or Natixis.
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Diversification and asset allocation may not protect against market risk or loss of principal.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.
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A fund’s environmental, social and governance (“ESG”) investment strategy limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. A fund’s ESG investment strategy may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards. In addition, companies selected by the index provider may not exhibit positive or favorable ESG characteristics.
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