Choosing the right model portfolio provider for your business

With so many factors for advisors to consider when choosing the right model provider, we consider four areas where we believe it pays to conduct careful due diligence. 

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If you’ve decided that using asset allocation model portfolios could be the right fit for your business, you’re in good company. The use of model portfolios among financial professionals has grown exponentially in recent years, and for good reason: Well-managed models can help take the hard work out of investing by offering a diversified group of assets, investment styles, and managers overseen by a robust due diligence process in a single solution designed to help professionals assist their clients pursue their financial goals. By removing the need for investment research, portfolio construction, rebalancing, trading, and manager selection, financial professionals have found that models can free up more time better spent with clients on holistic wealth and financial planning

 

A checklist for manager due diligence

Before selecting your model provider, it may be helpful to consider the types of asset allocation strategies available and which may be most relevant to your clients. What type of features and characteristics do the provider’s models offer? Is its asset allocation style more dynamic or strategic in nature? Which asset classes are available? How often are the models rebalanced? Is there an overlay fee?

As with any major decision, it pays to do your research in advance. When selecting a model provider, we believe there are four key factors worth considering.

1       Asset allocation expertise

Portfolio construction and asset allocation are key drivers of total return, so look for a provider with proven asset allocation credentials. We believe portfolio construction should focus on creating an asset mix within the risk parameters and outcomes expected by clients. The building blocks of a portfolio should be drawn from a wide range of complementary asset classes, including alternatives, which seek to deliver broad diversification, help protect against volatility, and provide maximum potential flexibility.

Models can be offered as mutual-fund-only portfolios, ETF-only portfolios, or a combination of the two, and are available with a range of objectives, the most popular strategies include:

  •       Target risk—designed for investors seeking a relatively stable balance of risk/return potential over time
  •       Dynamic asset allocation—adapting to macro, momentum, market sentiment, and fundamental factors
  •       Tax sensitive—pursues higher risk-adjusted returns on an after-tax basis

Other models may include

  •       Target date­—gradual, dynamic derisking as the anticipated year of retirement draws closer
  •       Risk aware—managed volatility portfolios designed to derisk as markets fall and rerisk as they rise
  •       Thematic— emphasizing attractively valued sectors, industries, or themes, such as Environmental, Social and Governance (ESG)
  •       Alternative asset allocation—focuses on alternative markets, investment styles, and absolute return approaches
 

Asset allocation models offered by providers (%)

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Source: The Cerulli Report: U.S. Asset Allocation Model Portfolios, 2020.

 

2       Multimanager diversification

In our view, diversification should extend beyond asset classes to include multiple investment styles and multiple managers, allowing clients to benefit from the ideas of expert and independent investment teams across the world. While most models provide diversification among assets, some providers are also able to offer a multimanager approach. This not only provides an additional layer of diversification, but it also expands the opportunity set for return generations. No single asset manager can do it all, so look for a multimanager model provider that can offer a dedicated manager research team to source and bring together the right specialized managers with proven track records and skill sets.

3       Ongoing support

Financial professionals choosing to offer model portfolios to their clients will want to ensure they’re well supported by their model provider; this is a partnership, not a transaction, so ongoing support is key. Financial professionals can benefit from partnering with an experienced asset management company able to provide a robust investment process and a documented rationale for key investment decisions. They may also be able to leverage manager investment commentary and other materials to keep clients up to date on market developments. Strong support builds business and provides a better client experience, so consider the depth of the provider’s sales and service team.

4        Fee structure

As with every investment, it’s important to understand the fees associated with using models. Your firm may charge a fee for implementation of the model; the asset manager may charge an asset allocation fee depending on the strategy and the underlying securities. In addition, understanding the value of the underlying managers in a multimanager strategy and factoring in their charging is another factor to consider when evaluating the fees and tools being used by the asset allocation team. We believe that a balanced approach, with a combination of both active and passive products, can often be one of the most effective approaches over the long haul. However, we also understand clients have personal preferences, so we offer several solutions to match our clients' needs.

 

Not all model providers are created equal

Model portfolios can help take the hard work out of investing, offering a diversified range of asset classes and managers to help you help your clients pursue their financial goals. While the choice of models available has never been greater, scale, experience, and architecture can vary widely across the industry, so financial professionals should do their due diligence before partnering with a model provider.

With so many factors for advisors to consider when choosing the right model provider, we’ve created a due diligence checklist to help simplify the process. The list covers what we believe to be the key points that advisors should consider as part of their selection process. 

 

Asset allocation model portfolio provider due diligence checklist

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To find out more about model portfolios and how they might help you and your clients, explore our page on asset allocation model portfolios.

1 Broadridge, 2019.