Model Portfolios for Advisors – Why Now?

Model portfolios can be an indispensable tool for coaxing reticent investors back into the fold with a measured level of diversification and customized risk adjustment.

Rapid change continues to upend the financial services industry. After a decade of low-cost index funds, intense competition among fund managers continues unabated, exerting downward pressure on fees.

Robo-advisors have now been added to the mix, giving investors a plethora of negligible-fee investment choices. The advent of recent commission-free trading has ineradicably altered the investment management business.

In the new competitive, cutthroat environment, investors have become more demanding: they want — indeed expect — low fees, enhanced servicing, and a menu of investment options from which to choose.

Additionally, some advisors have the burden of persuading shell-shocked, post-pandemic investors back into the market.

How can financial advisors survive and thrive in this untoward, low-fee environment?

Model Portfolios: A Swiss Army Knife for Advisors

Today, an Increasing number of advisors are discovering that an optimal solution for responding to the shifting paradigms upending the financial services industry is the utilization of model portfolios as an integral part of their practices. Model portfolios may help advisors meet the persistent demands of clients who are increasingly savvy about financial instruments.

These portfolios provide advisors with a cost-effective and expeditious way to increase total AUM. Outsourcing portfolio creation and monitoring eliminates the time-consuming and patch-work task of assessing suitable asset weightings for a dissimilar roster of clients, each with diverse and unique investment objectives.

Advisors are discovering that partnering with proficient third-party investment managers provides them valuable time for more fruitful endeavors, such as client retention, account servicing, and converting qualified prospects into new clients.

Advisors are Embracing Model Portfolios

It should come as no surprise then that the popularity of model portfolios has experienced explosive growth — similar to the meteoric rise of ETF’s during the past decade. According to a Morningstar report published in August 2020, 400 new model portfolios have launched since 2018.1

As an indication of model portfolio’s popularity, Broadridge Financial Solutions, a tech research firm, estimated that fund flows into model portfolios had grown to a staggering $3 trillion by the end of the first quarter of 2020.

Jillian DelSignore, principal at Lakefront Advisory and former head of ETF distribution for JPMorgan Asset Management, notes that financial advisers are increasingly drawn to third-party models because they help offload risk as well as freeing up more time for managing client relationships and prospecting for new business.2

Advisors are discovering that model portfolios can be an indispensable tool in coaxing reticent investors, fearful of future market gyrations and volatility, back into the fold. Due to their unique structure, model portfolios, no matter how aggressive the risk component, are designed to incorporate a measured level of diversification. They aim to result in an adequately risk-adjusted portfolio for each individual client that is commensurate with their overall long-term objectives.

Model portfolios incorporate rigorous professional analysis, comprehensive research, and reflect the long-term experience of highly skilled investment managers. With Separately Managed Accounts (SMA), advisors can provide clients with custom tailored financial solutions that can be structured to address each client’s varying investment objectives.

Younger advisors are enthusiastically embracing the model portfolio strategy for meeting client’s long-term financial goals.

A July 2020 Broadridge Report revealed that advisors under 40 years old have nearly 60% of their fee-based advisory assets in model portfolios. The report noted that those same respondents expect their fee-based advisory assets to be 66% in model portfolios by 2022, while 26% of respondents under 40 expect to have 100% of their fee-based advisory assets in model portfolios within two years, allowing for an “increased focus on client service.”3

Model portfolios provide advisors with a flexible tool that can be readily adjusted for a client’s differing needs throughout their investing life cycles. These recalibrations can be accomplished at little additional cost.

Advisors are recognizing the benefit of collaborating with investment managers, ETF issuers, and index providers/strategists. According to Broadridge, more than half of managed assets are invested in some type of model portfolio, with 70% of advisors utilizing a combination of model and custom portfolios.4

New Tools Required for Changing, Unstable Market Conditions

Old paradigms and assumptions that have guided financial markets, from econometric and monetary theory to staid principles of investment and portfolio management, are now being reexamined and, in some cases, discarded, creating numerous traps for the unwary. Advisors need investment vehicles that can navigate tumultuous, changing market conditions.

Model portfolios by themselves and in conjunction with novel fintech features offer advisors a number of distinct advantages for growing their businesses and for providing clients with an unsurpassed level of servicing:

• Model portfolios are scalable. The expertise used in crafting appropriately weighted, risk-adjusted portfolios for high net-worth clients can just as easily be applied to those accounts with modest assets. A telling 2019 Broadridge study found that 73% of advisors view models as the preferred approach for client accounts below $500,000 in asset size vs 31% for the $1 million-plus segment.5
• Commission-free trades now permit discreet adjustments to portfolios. Asset rebalancing can be done in a cost-effective and efficient manner.
• Fractional share trading now permits investors of modest means to purchase and participate in the growth of some of the market’s momentum titans. Advisors can incorporate this novel fintech device within their portfolio offerings to convert prospects more readily into long-term clients.
• Model portfolios are outcome oriented. Advisors prefer model portfolios because, unlike mutual or index funds, they are client centric. Advisors can utilize a model portfolio either individually or in tandem with a client’s existing holdings to achieve a desired rate-of-return result. This strategy is dynamic and can be easily reconfigured to meet client’s goals as they evolve over time
• Model portfolios offer the ability to manage taxable gains more judiciously. Unlike mutual funds, model portfolio investors own the investments directly, so they can take long-term or short-term gains and losses to comport with their current and future financial planning needs.

Global Beta Advisors’ Comprehensive and Varied Suite of Model Portfolios

Global Beta Advisors offers an array of model portfolios suitable for a variety of investment styles, diversification levels, and quantum of risk tolerances. Our product offerings cover the gamut from comprehensive and assiduously designed indexing strategies to a menu of S&P 500-based factor strategies. Single factor index strategies available include Momentum/Growth, Value/Quality, Smart Income, and Low Beta as well as a Size Index.

Multi-factor strategies include Global Beta’s All Cap Multi-Factor Strategy and its Large Cap Multi-Factor Strategy.

More recently, Global Beta has launched a dynamic custom index that identifies emerging domestic growth companies at relatively attractive valuations. Global Beta believes this strategy can provide investors with exposure to the next generation of technology-based titans in the most disruptive industries.

Each offering in GBA’s complement of model portfolio strategies is the product of prodigious research, rigorous back testing, and investment prowess based on its extensive experience in the financial markets. Each model portfolio is monitored closely and its constituent assets assiduously rebalanced to align with their designated benchmarks.

GBA’s products incorporate a price-to-sales ratio to mitigate overvaluation exposure that can be endemic for certain groupings within the momentum and growth sectors.

All of our products can be acquired through a SMA or an index license. Additionally, GBA offers its proprietary ETF Model Portfolio as a SMA or through a low-cost licensing structure.

Global Beta Advisors has been working with institutions for over ten years. Our model portfolios are particularly well suited for the investment demands of pension funds in an abysmally low interest rate environment that may prevail for years to come. We can offer pension funds our proprietary ETF Model through a licensing or SMA basis.

The coronavirus pandemic and radical changes in the financial services industry have proven to be coeval events. Technical innovation ensures that creative destruction will continue anew. Financial advisors will need appropriate tools to respond to ever-changing and challenging market conditions with unpredictable spasms of volatility.

Advisors equipped with GBA’s model portfolios will be well poised to adapt to the challenging and uncertain market conditions that lie ahead.

  1. Wall Street Creates $3 Trillion Whale in Model Portfolio Boom, Bloomberg, August 22, 2020
  2. Ibid.
  3. Model portfolio assets dropped to $3 trillion in first quarter, Investment News, July 1, 2020
  4. Distribution in a model driven age, Broadridge Financial Services, 2019
  5. Ibid.

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