As institutional asset managers and investment advisors continually seek to improve their level of service and variety of product offerings to their clients, high-quality model portfolios have proven to be an indispensable tool for many – and their ranks are growing quickly. When Institutional Investor conducted a global survey of 759 institutional investment decision makers in Q1 2022, nearly half (49%) of the respondents said they use model portfolios as part of their solutions for allocators, and another 35% of these institutional asset managers and advisors said they’re likely to do so in the future (n = 348).
Increasingly, managers and advisers are viewing well-constructed, dependable models as a cost-effective, efficient way to provide their growing client base with solutions that focus on specific investment goals and needs.
Accordingly, use of model portfolios has increased rapidly over the last several years, as legions of financial professionals have discovered the time-savings, simplicity, and reliability that they can offer. In fact, assets in model portfolios have more than doubled since 2016, surging from $2.1 trillion to more than $4.9 trillion through Q3 2022. Analysts expect this extraordinary growth to continue, with projections that assets in model portfolios could hit an estimated $10 trillion by 2025.1
Empowering scalability and more personalized portfolios
While the forces driving the usage of portfolio models is still evolving, it’s clear that their popularity with investment firms stems in no small way from freeing up time-pressed asset managers and financial advisors to cost-effectively scale their business – while also offering their clients more targeted solutions to answer specific investment needs.
“Model portfolios continue to gain popularity for good reason,” says Eric Leake, Co-Portfolio Manager at Anchor Capital, an RIA with over $500 million in AUM. “At Anchor, we’ve seen growing demand for model solutions that also incorporate risk management. Through our Total Solution Portfolios, advisors can access risk-managed building blocks within a turnkey model portfolio encompassing US equities, global equities, and credit. The result is an investment solution with the potential to keep clients on course, especially during periods of market uncertainty.”
Additionally, using model portfolios can allow professionals with limited resources to provide clients with portfolio strategies that rival the customization and effectiveness of those offered by much larger investment firms, increasing the potential base of investors that they can compete to serve. This is especially true when model portfolios include ETFs.
“There’s no way I can compete with resources of a BlackRock or Morningstar,” adds a CFP/RIA with $33 million in AUM. “So why not outsource to the experts and bring the cost down in the process?”
The big three: Global allocation, Income and ESG
While managers and advisors can choose from a large variety of models from providers, Institutional Investor’s survey found that three types are most popular among models that they recommend (or plan to recommend) to asset allocators. These focus on global allocations (61%), income (57%), and ESG and sustainability, also at 57% (n=331).
It’s worth noting that when the global survey was conducted, in early 2022, there was heightened economic stress driven by growing inflation, rising interest rates, armed conflict in Ukraine (which in turn created wider geopolitical concerns), and volatile commodities markets. As these factors and others potentially strengthen risk-off trends on the part of investors, it could influence the choice of model portfolios among managers and advisors.
While dominating themes can evolve, the growing demand for ESG solutions has yielded a particular strong use case and an example of how asset managers and advisors can use model portfolios to scale delivery of their investment views. Customizing a client portfolio with ESG exposure from scratch – while explaining the explaining the rationale behind each choice, saddled by frequently inconsistent definitions and measures of what constitutes reliable ESG data – would be extremely time-consuming for most financial professionals. Alternatively, they could consider using a model portfolio with ESG funds as the core of a client’s portfolio, while adding customization through an allocation to satellite positions.
Strong support is a key differentiating factor
Seasoned managers and advisors know that all model portfolios are not equal, even when you’re talking about models that select their underlying components using the same criteria, track the same indexes, and, perhaps most surprisingly, have delivered nearly identical returns. The difference often comes down to the strengths and perks offered by the model portfolio provider.
So what makes a provider a winning choice? In a word, support. Informational events are powerful; the Institutional Investor survey found that managers and advisors who use model portfolios are most pleased when their clients and prospects can attend a model-focused event hosted by the asset management firm that creates and supplies the models (61%; n=331). Specialized marketing programs and relevant content are next, at 59%. A strong performance record? That ranks a close third at 58% -- which clearly suggests that excellent performance alone will not necessarily elevate a model portfolio provider over a competitor that offers managers and advisors superior end-client support.
“When I consider a third-party model provider, a strong brand is important, but I also look for a variety of portfolios that are tax efficient. Having a dedicated relationship with model provider also makes a big difference,” the CFP/RIA says. “[I like to have] regular check-ins to talk about what’s happening in markets so I can educate myself and distill it to my clients. I don’t have to worry about what ETF to pick or to pull. [The model provider has] really smart people doing all that for me.”
1 Bloomberg, Broadridge Financial, 1/18/22
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