The increasing awareness of the benefits that models can offer has led to an explosion in products available to financial professionals and their clients, but the proliferation of choice requires careful navigation.
The use of model portfolios among financial professionals and their clients continues to grow year by year, 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 help their clients pursue their financial goals.
Providers can vary as much as the models can themselves, however, and scale, experience, and fee structures can differ widely across the industry. In this article, we take a closer look at how models can help financial professionals and consider what to look for to help ensure you’re choosing the right provider to partner with.
Benefits of using model portfolios
One of the biggest benefits for financial professionals who’ve embraced the use of models is the time they save. By removing the need for investment research, portfolio construction, rebalancing, trading, and fund rationalization, models can free up more time better spent with clients on holistic wealth and financial planning. Research suggests that financial professionals currently spend an average of 17% of their time on investment management, including 10.7% on investment research, due diligence, and monitoring, and another 6.1% on trading and rebalancing. Comparatively, they spend about 9.5% of their time on financial planning and another 9.5% of time prospecting new clients.¹
The same research found investors valued customized and comprehensive advice above all else—including investment performance relative to the overall market—when choosing a financial professional.¹ Advisors need to mind the markets, but not at the expense of delivering what’s most important to their clients: personalized service that matches their specific needs.
Models can also help financial professionals grow their business faster and more effectively. New accounts may be integrated and serviced more efficiently, as investors with similar risk profiles could fit similar models. Furthermore, professionals too burdened to cultivate prospects may miss opportunities to convert them into clients. This is evidenced by a recent survey by Envestnet, one of the largest turnkey asset management platforms in the industry. Four out of five financial professionals who completed Envestnet’s model portfolio training program began to outsource their modeling, leaving them more time to cultivate new business—and grow assets by 41%.²
Financial professionals can also 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.
Selecting the right model portfolio provider for your needs
The increasing awareness of the benefits that models can offer has led to an explosion in products available to financial professionals and their clients, with recent research finding that around 400 model portfolios had launched since the beginning of 2018.³ While choice should be welcomed, this proliferation of products requires careful navigation, as not all models are created equal. Providers can vary as much as the models can themselves, and scale, experience, and fee structures can differ widely across the industry.
We believe there are four factors worth considering when selecting a model provider.
1 Asset allocation—Portfolio construction is the beating heart of an effective model and is a key driver of total returns, so look for a provider with proven asset allocation credentials.
2 Multimanager diversification—While most models provide diversification among assets, some providers offer a multimanager approach. This not only provides an additional layer of diversification and reduces groupthink, but 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 Fee structure—Additional overlay charges may increase total expenses, so it pays to research fee structures before partnering with a model portfolio provider.
4 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. Strong support builds business and provides a better client experience, so consider the depth of the provider’s sales and service team.
Model portfolios can create valuable free time for financial professionals to focus on the needs that matter most to their clients, such as financial planning and customized support, while also providing the infrastructure to help their businesses grow. However, 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 research before partnering with a model provider.
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 “U.S. Asset Allocation Model Portfolios,” Cerulli Associates, 2019, 2020. 2 “When should you manage your own investment models? Maybe never,” Financial Planning, 2/19/19. 3 “2020 Model Portfolio Landscape,” Morningstar, August 2020.