Amid investor interest in a broader investment universe and tailored portfolios, asset managers and advisers increasingly view model portfolios as an efficient way to provide their growing client base with institutional-grade, cost-effective solutions that focus on well-defined investment objectives.
Model portfolios are typically composed of specific asset allocations designed to align with investors objectives or values. At their core, model portfolios are a unique way for investment advisors to outsource asset allocations to managers that have vast research and portfolio management expertise. Within a model portfolio, asset managers can select and rebalance from a broad investment universe, including individual assets, exchange-traded funds, and other investment products in an effort to deliver returns under risk, asset class, benchmark, and thematic constraints. Financial advisors and other intermediaries can then provide these portfolios at scale to their clientele, thus outsourcing asset allocations and investment selection to portfolio builders with expansive research and analysis capabilities. By doing so, advisors are able to focus on building strong client relationships, developing new ones, and delivering sophisticated portfolios to investors efficiently.
Model portfolios are an increasingly attractive means for asset managers to serve the advisor community and ultimately the end investor. Indeed, nearly half (49%) of the 348 institutional asset managers and advisors in a 2022 study from Institutional Investor said they use model portfolios as part of their solutions for intermediaries and allocators, and another 35% say they’re likely to do so in the future. (Click here for a complete copy of the study.)
The findings of this study among institutional investment decision makers worldwide are largely confirmed by the growth of the use of model portfolios in recent years, as legions of investment professionals have embraced the time-savings and simplicity that such portfolios can offer. In fact, assets in model portfolios have more than doubled since 2016, surging from $2.1 trillion to an estimated $5.9 trillion through 2022, according to analysis from Broadridge, a financial data firm. Broadridge forecasters believe this extraordinary growth will continue, with projections that assets in model portfolios could hit an estimated $10 trillion by 2025.1
Scalable, institutional-grade, account-specific portfolios in an increasingly complex climate
Model portfolios can allow professionals with limited resources to provide clients with sophisticated portfolio strategies that enable professionals to compete with larger investment firms – and more time to focus on clients’ long-term objectives. “I’m a big believer in third-party model portfolios,” says an RIA with $33 million in AUM. In his “make-or-buy” assessment on behalf of his clientele, he sees great value in the scale, expertise, and avoidance of internal research costs available through model portfolio providers. “There’s no way I can compete with resources of larger firms. So why not outsource to the experts and bring the cost down in the process?” says the RIA.
Managers seize opportunity with diverse model offerings
Asset managers seem to view model portfolios as an especially viable path to increased assets under management, and in aggregate they appear to be well on their way toward offering a roster of robust offerings to advisors and their clients. The 2022 Institutional Investor survey found that a solid majority – 84% – of the 348 asset managers in the study currently offer or expect to offer one or more model portfolios. Queried on whether they manage various model portfolios, 61% of this cohort of 293 asset managers in the study offer global allocation models, 51% develop U.S. focused models, and 50% provide international models.
Two outcome-focused model strategies are also top of mind among the 293 product developers at asset management firms that currently offer model portfolios or plan to do so in the study. Models focused on income generation are currently or will be offered by 57% of such respondents, and the same proportion – 57% – are focused on models dedicated to sustainability mandates.
Investor demand for customization – from a “go-anywhere” approach of a global allocation to a tightly focused income generation or a similar thematic approach – offers a particular strong use case for how asset managers and advisors can use model portfolios to scale delivery of sophisticated investment thinking. Building an offering from scratch – while explaining the rationale behind each choice amid the moving target of many asset classes and investor requirements – would be extremely time-consuming for most financial professionals. As an alternative, they can use a model portfolio composed of ETFs as the core of a client’s portfolio, while adding customization through an allocation to satellite positions in a separately managed account. “We can build balanced asset allocation model portfolios similar to those of large institutions such as pensions or endowments that provide a better solution for advisors to use with their clients,” says Glenn Ambach, a CIO at Cantor Fitzgerald Investment Advisors. “We start just as a large institution would – with long-term strategic allocations across asset classes. We then review economic and market data to implement tactical shifts to the asset classes. Lastly, instead of employing a manager or multiple managers within an asset class, which may be prohibitive for many, we gain exposure to the asset classes by utilizing diversified, liquid, low-cost ETFs.”
Model portfolios may provide more benefits than simply another product in an advisor’s or manager’s suite of offerings. Model developers typically provide a wide array of additional services to support model delivery to investors. Many of the 293 asset managers in the Institutional Investor study that currently or expect to offer model portfolios say investors value model-focused events (61%), specialized collateral (59%), and other forms of close engagement between model managers and those who offer them to investors. Indeed, one source in the study reveals the depth of his collaboration with his model provider of choice. “Having a dedicated relationship with a model provider also makes a big difference,” the 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 for my clients.”
ETFs are often at the heart of a broad range of model portfolios
Asset managers and advisors can offer investors turnkey model portfolios that are composed of a diversified mix of ETFs providing exposure to companies they believe exhibit suitable investment characteristics – from risk/return profile to a geographic or thematic focus. Such models can be designed to help deliver tax efficiency, keep costs low, and offer attractive return potential. Model developers often use combinations of ETFs to build model portfolios that are designed to provide broad exposure to an asset class or particular market, or to a focused thematic strategy such as sustainability.
“We have broad-based sustainable impact portfolios where we pick ETFs and managers that are intentionally focused on ESG,” said a head of portfolio management at asset manager/private bank with $1.6 trillion in AUM in his interview for the Institutional Investor report.
1 Bloomberg, Broadridge Financial, 1/18/22
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[1] Bloomberg, Broadridge Financial, 1/18/22
