Portfolio Intelligence podcast: how financial professionals may benefit from leveraging the power of model portfolios

John Bryson:

Hello, and welcome to the Portfolio Intelligence podcast. I'm your host, John Bryson, head of investment consulting and education savings at John Hancock Investment Management.

As always, the goal of this podcast is to help investment professionals deliver better outcomes for their clients and their practice, and today's topic addresses both of those. If we look at the marketplace, model portfolios continue to see strong growth as advisors increasingly allocate a larger portion of their client assets to asset allocation models. We look today at how advisors are using model portfolios in their practice and touch on some of the important criteria advisors should be looking at when finding a model portfolio provider.

To explore this topic, I've invited Katie Baker, senior national account manager and model delivery lead for John Hancock Investment Management to the call. Katie’s responsible for growing the distribution of our ever-growing model portfolio business.

Joining her is Bruce Picard, portfolio manager and head of model portfolios at Manulife Investment Management. Bruce is responsible for the development of the multi-asset solution team's model portfolio business, which provides discretionary and nondiscretionary investment models to investment professionals and broker-dealers around the world.

Katie, Bruce, welcome to the podcast.

Katie Baker:

Thanks so much for having us, John. We appreciate being here. This is an exciting thing for us on the model team today.

John Bryson:

It sure is. All right. Katie, I'm going to start with you. Maybe you can give us and our audience an overview of the models landscape.

Katie Baker:

Yeah, sure. So we know that based on what we're seeing here at John Hancock Investment Management, but also across the industry, that models are becoming a larger and larger part of advisors' practices, and we started to see this trend a handful of years ago when home offices started to want their advisors to use model portfolios. And then at the same time, advisors who were, maybe used to their own specific home office model started to say, "Hey, there's more out there. I want access to more," meaning, "I want to look at this third-party model landscape that's growing."

And so some home offices have been pushing their advisors toward using both home office and third-party models and to get them away from being portfolio manager to potentially increased diversification in their client portfolios, and then also to ease some of the compliance burdens that are really put on financial professionals today when they're managing portfolios.

And when we think of the landscape and some of the statistics around it, according to reports from Bloomberg and Broadridge, both that came out earlier this year, January of this year, we know that since 2016, assets and model portfolios have more than doubled, from $2.1 trillion to more than $4.9 trillion, and that was through Q3 of this year, of 2022.

And then looking at the numbers and how they're going to grow, the expectation is that they're probably going to more than double again, maybe to an estimated $10 trillion by 2025. So we've seen this trend certainly at our firm level, but also backed up by industry data like that.

Also, in 2020, Cerulli released their annual report on U.S. asset allocation model portfolios, and they noted that over 16,000 advisor practices indicated their primary portfolio construction process involved model portfolios created outside their practice that they don't alter or modify, which is, of course, music to our ears.

And as a third-party asset manager, we pay careful attention to both these types of stats. And if we're seeing home offices continue to influence their advisors toward using third-party models like the models that we offer—and like that Cerulli report I just referenced—we think that the model portfolio space has a long runway and that there's significant opportunity to capture some of these assets, particularly as we see baby boomers start to pass on some of their wealth to that next generation.

John Bryson:

And anytime that me and my team we're talking to advisors, it's a challenge of getting everything done for your clients and really focusing on the clients. So dig into this for our audience, the benefits on the business side and the investment side of leveraging asset allocation models.

Katie Baker:

Sure. I know we only have 20 minutes, I could probably talk for 45, so I'll try to limit my statements here. So when we think about the evolution of an advisor's business, they've really evolved from back in the day: They were stockbrokers, and they were picking mutual funds and SMAs and annuities, and then on ETFs. And then of course, now today, we're really looking at a lot of advisory products being used in an advisor's practice, which of course includes model portfolios.

And from a practice management standpoint, model portfolios are really an important tool to scale business, to manage risk, and potentially deliver a better overall client proposition.

Now, starting back at the top, in terms of providing scale, we know that the key to growing successful business is really to scale the things that can be scaled and then spend time on the high-touch aspects, which very often are the relationship management aspects that really require that one-on-one attention that we know clients are seeking from their financial advisors.

The advisors starting out can immediately tap into expert resources, knowledge and expertise and investments, and they can leverage the knowledge base to benefit their clients, and they get fully researched and constructed portfolios that are aimed at a specific level of risk from conservative to aggressive, or for a specific purpose such as an income model. So that's the advisor starting out looking at this landscape.

When we think of an advisor who's been doing this, for let's say 20 years, they can certainly gain a significant amount of time savings, which then can be used to secure more clients, grow their client base, or maybe deepen relationships with existing clients.

And then thinking about an advisor that's maybe toward the end of their career, and they may be looking to retire themselves, or they just want to be less hands-on in their business, or maybe transitioning the business to their kids' control, or maybe they're looking to sell their practice. Those are obviously a variety of scenarios that we've seen for the end of someone's business. But for these advisors, models can provide a foundational scalable base, which means that they have more time to, again, whatever it might be for that particular advisor, grow their business, deepen relationships, or for that business’s succession planning.

And then in terms of managing risk, it's certainly not a secret that financial advisors’ duties are getting more and more stringent with greater levels of compliance and recordkeeping requirements than we ever have seen in the past. And these are needed to show a thorough and robust research and investment process that has been followed prior to making an investment recommendation.

Now, operationally, as an advisor's practice grows, the work around the investment and manager due diligence, asset allocation, and investment monitoring grows as well. They go hand in hand. And if an advisor doesn't choose to scale this particular side of their business, operational risks can certainly just grow and grow over time.

And as the investment landscape changes, it becomes more complex. Asset correlations, return expectations, and manager performance changes, which really makes an advisor's job more complex: trying to cover all of these available asset classes and check all those boxes at the same time.

And last, models help deliver a potentially better overall value proposition for clients. And we certainly know that holistic financial planning is becoming more and more often the number one client need out there, and clients want more of that high-touch interaction with their advisors, which of course, in turn, requires more time out of an advisor's day. And this is evident during times where we have a lot of volatility in the markets and clients want and they need more consultation and communication with their advisors during these times.

And when we look at the landscape and we look at some of these volatile times, we lean on our behavioral finance knowledge, and that tells us that clients may freeze during these times in terms of making decisions that really need to be made, especially as investors are surrounded by so much access to, likely, negative news when they turn on the news about the markets.

And one of the advisors most important duties at this time is to really keep the clients focused and to be a reminder of the basic principles of investing, like focusing on long-term performance and avoiding the urge to sell everything.

And an advisor who during these times is using asset allocation models, really gains from the investment rationale of the fund manager. And then, in turn, they make out because they can then spend more one-on-one time with their clients, consoling them, talking through what's going on in the markets, rather than scrambling, trying to research and keep up with the markets overall.

So again, I could talk for 45 minutes about the business case for using model portfolios, but those are just a few.

John Bryson:

No, those are great. And I certainly look back, today's November 1, we look back in October and September. We saw a lot of people leave the markets in September and they would've missed the gains in October, and that's the benefit of a portfolio like this.

So, you mentioned on the business side, I loved what you said at the beginning, managing your business risk, achieving scale as an advisor, and then delivering better overall client proposition and results.

Bruce, I want to pull you into this conversation and get into the investment case. So, talk to us: What is that case for using models? What are you talking about with advisors, things they should consider?

Bruce Picard:

So once again, John, thanks for having me today, having us today. This is a great conversation.

I think when it comes to the investment side for model portfolios, we're really seeing this strong growth driven by financial advisors and their clients seeing the benefits of investing through them. And I think if I could pull it together, it's really bringing institutional-grade oversight to individual accounts. Key elements of that are researching and choosing the specific holdings, whether it be ETFs or mutual funds, and then combining that with understanding the markets and putting together an asset allocation mix that's appropriate.

And I think there also are some forgotten parts, and part of that is just the ongoing monitoring of portfolios, monitoring the markets, trading portfolios. That really comes together.

And this goes back to a lot of the things that Katie mentioned, which is the financial advisor is still very important, but rather than them focusing on the day-to-day burden of management, they can really judge the firms and the model portfolios, what their offerings are. So they can look at seeing whether the firms have the depth, the teams, the global reach, and the experience to run portfolios so that they can really build long-term relationships.

John Bryson:

So, listeners to this podcast know a lot about the John Hancock Investment Management model. We're a multimanager model. We have all these different asset managers around the world. We leverage our internal capabilities, which are really strong in asset allocation, your team, and fixed income. But talk to me about how you’re leveraging all those strengths that John Hancock and Manulife have and pull it together in this process.

Bruce Picard:

I think when it comes to our offerings, we have a long history of managing model portfolios, since 2011, which is pretty early for this emerging part of the industry. But as you noted, we're really well positioned to deliver model portfolios because you need to have a wide range of model portfolio solutions.

So model portfolios, we have over $5 billion in AUMA, and you really want to do this, in order to do this, you really need to have a wide range of mutual funds and ETFs. And so, for me, as a portfolio manager, the John Hancock approach, the multimanager approach, our wide range of choices that go well beyond just equity and fixed income into things like alternatives, really gives me a lot of choice.

One of the key differentiators for the John Hancock model portfolios are that the model portfolios are run by the same asset allocation team that runs over $120 billion that you know from a wide variety of other offerings.

So it's not a separate group. We're not removed from the investment expertise. We're part of that well-established team that first started running asset allocation portfolios in the 1990s.

And then you bring that together with another key differentiator for us is our global manager research team. So just like our portfolio managers, global manager research is a deep experienced global team, and they really open up our platform so that we can confidently access a wide variety of asset classes and styles, the things you find in our portfolios. And we also believe it gives us the potential to add value from both asset allocation and those manager selection decisions.

John Bryson:

Now, when I'm talking with advisors and my team is talking with advisors, we're highlighting that we're often on the same side of the table. We're doing a lot of the same things they're trying to do. We're just trying to make it easy for them with our model. How do the models that you’re building align with the needs of the advisors that you're talking to?

Katie Baker:

Sure, absolutely. We find that advisors are looking for, these days in 2022, they're generally looking for maybe a core asset allocation-type model. I know Morningstar in 2021 said that roughly 75% of assets flowing into the model portfolio space tend to go into the target-risk portfolios.

And now we're finding as we move through 2022 that advisors are starting to look for more, meaning completion-type models.

So, for example, the fixed-income space has been pretty rough the last couple of years. So advisors may say, "You know what? I want to utilize an asset manager who has an expertise in fixed income. I want them to look for different types of fixed income based off the market environment, and I want to add that sleeve to my existing portfolios to complete that fixed-income space and take that work off my plate,” if you will.

So the space is starting to evolve a little bit in that sense, in that we're moving outside of just those core asset allocation-type model portfolios and moving on to a little bit more advanced and flashy, if you will.

John Bryson:

That's great, and Bruce, maybe you can dig in a little bit more and highlight the different models that you and your team offer.

Bruce Picard:

Thanks, John. I'd definitely love to. We have a range of strategies that are available widely. They're all built on our multimanager capabilities. We have three suites of target-risk portfolios, and these align with our history of lifestyle investing as well. In target risk, we have an ETF suite, we have a mutual fund suite, and a hybrid suite. These portfolios have five different risk levels, from conservative to aggressive, so pretty traditional, and these are designed to be a primary allocation for clients. We also have a multi-asset income model. This is a diversified blend of both fixed-income and income-generating equities, and we go well beyond core fixed-income strategies in this portfolio to build income over time. The portfolio utilizes both ETFs and mutual funds, and as noted, it's designed to have to a yield advantage versus traditional fixed income. This type of strategy can be used as a primary fixed-income holding for clients who are looking to go beyond core fixed income, or it also can be used to complement a core fixed-income strategy, so as part of a wider asset allocation.

We also offer a core global equity strategy that is a blend of strategic and active management where we're looking at different market caps in the U.S., we're looking at different regions of the world, international, emerging markets, so on and so forth. We also are looking at our best ideas when it comes to implementing some sector allocations where we think there's value to be added there. This is really designed to be a core allocation where we're in the markets paying attention to what's going on and adjusting the portfolios for investors who are looking to have that approach for their equity allocations. That's our lineup.

John Bryson:

Now what's really appealing to me about the whole process is you're taking an institutional-level approach, but you're customizing it for all these different outcomes that clients need, and you're making the advisor's life easier by making it scalable and allowing them to spend time on their most important asset, which is their clients. So, Katie, if I'm an advisor, and I'm on board with the concept, how do I go about getting started?

Katie Baker:

Good question, John. Thanks. So thinking about this, I go back to the amount of advisors that I've talked to over the last few years, specifically about our models and our models business in so many conferences, so many events, and the one thing I have heard time and again, is the myth that if an advisor is going to transition to models, they have to have an all-or-nothing mentality.

This is simply not true. Advisors can actually segment their book using a few primary criteria and then figure out from there, maybe they don't want to move all their clients to model portfolios. Maybe they want to take a certain segment of clients and put them in model portfolios. Maybe they want to have a segment of clients where some will be in model portfolios, some won't.

And the way of really starting this process is first looking at the qualified accounts, of course, for the clients that aren't liable for taxes when changing the underlying investment components. And then next, looking at the nonqualified accounts, which can further be segmented by low or high unrealized gains.

Of course, investors with low unrealized gains may benefit from a move into model portfolios without significant tax consequences.

Segmenting clients by assets in revenue can also be another criterion. So some clients have highly complex needs, and they may not be appropriate for model portfolios, but then there are many clients who have similar needs, and you could really have them be candidates for model portfolios, and you can lump them together into maybe three distinct model portfolios based off their investment needs.

And advisors can also adopt a hybrid approach, where an outcome-based model, such as an income model like referenced earlier, can be used to complement an existing portfolio.

And then another myth that we've heard is that introducing models into a practice is going to be time consuming: “I don't know if I want to use models because my business is running right now, and if I'm going to change things up, it's going to take all this time out of my practice."

But if you really sit down and have a very segmented approach to putting clients in model portfolios, moving into model portfolios, it becomes relatively easy to identify clients that might benefit.

And last, the sales and advisor support is really a key element of helping advisors navigate the landscape and decide how best to fit models into their practice.

I always say models are the product, of course, that an advisor needs to choose, but the advisor also needs to make sure that they're going to work with a partner that is going to help them not only transition to using model portfolios, but also to use them day in and day out and supply them with every single thing they might need in terms of if a client called them up out of the blue and they have up-to-date information, they have full knowledge of what's working inside that model portfolio.

So to get started, I would really sit down, I would segment your clients, and I would certainly work with the asset manager who you've chosen to work with to learn about what's worked for other advisors in the past and how they can help you transition.

John Bryson:

Excellent. And, Bruce, I have one last question for you. You've mentioned the heritage in running asset allocation models and multi-asset strategies. You've talked about leveraging the existing platform, the multimanager options that John Hancock has and the different vehicles, mutual funds, ETFs, etc. How do you stay on top of the evolving landscape so that the next model that we offer is going to continue to evolve and meet client needs?

Bruce Picard:

So I think that's a great question. I think what has been wonderful for me since I've been here, I came here about four and a half years ago, is really working with the resources we have as an organization, whether it be the John Hancock distribution force, over 120 staff members who are a line of sight into what's going on with financial advisors, talking to intermediaries, so on and so forth.

We certainly have our product folks where we look at some Cerulli data and also keep track of that. I think it's really just keeping track of what's going on in the industry, and part of it is you do have to plan ahead. So we also try to think about what do we have for capabilities? What do we have for something that could be a useful tool for a financial advisor and their clients going forward? So it's really a mix.

As a portfolio manager, I'm focused on the markets and macro environment, so on and so forth, but you can't do that in a vacuum, so I do try to stay plugged into that. We have a variety of regular meetings, Katie will attest to, so really just making sure that you're not just doing your investment work in a vacuum, but really getting plugged into what clients and their advisors want.

John Bryson:

I think that that end point is the most important one, what clients want and how we can evolve to meet their needs. Bruce, Katie, thank you so much. It is a fascinating topic. I'm looking forward to having you on in the future to hear what other developments have happened in the space.

Folks, if you want to learn more, you can always visit our website, jhinvestments.com, to catch up on our model business, on all of our portfolios, and if you like this, you can always subscribe to the Portfolio Intelligence podcast on iTunes or wherever you download your favorite podcast. Thanks, everybody, for listening to the show.

This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA, SIPC. The views and opinions expressed in this podcast are those of the speaker(s), are subject to change as market and other conditions warrant, and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal. Diversification does not guarantee a profit or eliminate the risk of a loss.

All data is as of 9/30/22 unless otherwise indicated. John Hancock Investment Management LLC and Manulife Investment Management (US) LLC are affiliated SEC registered investment advisers using the brand name John Hancock Investment Management.