Assets in model portfolios hit a record high this fall,
reflecting growing interest in preset investment options developed by Wall
Data provider Broadridge Financial Solutions estimates that
model portfolios held $4.1 trillion of assets in September, up from $3.5
trillion at the end of 2019.
Model portfolios are ready-made fund combos delivered
through financial advisers and brokerages to everyday investors. There is no
ready definition of a model portfolio. But the typical adviser using model
portfolios is doing the equivalent of serving a store-bought pie, rather than
baking one special from scratch.
The portfolios come in all shapes and sizes and are today
surging in popularity as advisers seek quick ways to invest client money. A
portfolio might use a classic investment formula of 60% in equity strategies
and 40% in bond funds split between a dozen funds, for instance, or use
algorithms to dynamically shift the funds it invests in as markets change.
“Model portfolios take some of the human emotion out of
investing,” said Andrew Guillette, a research director at Broadridge. “They
provide the comfort of science.”
Model portfolios are the latest example of the growing
influence of bundled financial products on modern markets. Financial advisers
typically use model portfolios to meet investors’ goals quickly, rather than
building a portfolio specifically for that person. They can sometimes override
the preset investments.
In the Covid-19 pandemic, advisers have used them to whip up
portfolios to allow them to deal with more-pressing issues for clients—such as
emergency or estate planning.
The models’ rise follows a decadelong transformation of Wall
Street. Index funds that mirror markets and robo advisers that automate advice
lowered the cost of investing. Human advisers were under pressure to provide
cheaper services. Some moved to offering fee-based portfolios filled with
low-cost funds—rather than giving priority products that would bring
Cheap exchange-traded funds provide abundant building blocks
for models. Some asset managers jumped into models as a way to distribute their
own funds in bulk.
After the 2008-09 financial crisis, brokerages tried to rein
in advisers who took excessive risks. Encouraging them to use pre-vetted model
portfolios was one way to curb rogue trades.
“The models are road tested and designed by experts,” said William
Trout, head of wealth management at consulting firm Javelin Strategy &
Research. “They keep the adviser on the right side of regulations.”
The extreme selloffs in March and ensuing volatility
prompted more advisers to park money in model portfolios, Broadridge said.
Across the market, model portfolios took in new money to make up nearly 30%—the
highest-ever share—of fund assets managed through U.S. financial advisers and
brokerages in September, according to Broadridge.
As firms that manage model portfolios buy and sell funds to
keep them in check with targets, the tweaks can make big waves that aren’t
always well received by the market.
Edward Jones, with thousands of advisers, is one of the
biggest providers of model portfolios with some $200 billion of client assets
in advisory accounts that can be invested in model portfolios. As those models
powered big flows in the early 2010s, some fund managers complained they
couldn’t handle the swings, said people familiar with the matter.
Edward Jones created in 2013 its own fund lineup called
Bridge Builder —which picks multiple firms to run strategies—to reduce the
impact of model shifts and lower costs for clients. Its model portfolios now
provide access to those funds as well as others. The firm added that when it
adjusts models, “we work with each asset manager to minimize the impact on
clients and market liquidity.”
Firms don’t have to disclose their models’ daily values or
sizes to regulators or the public, so it is impossible to pin down precisely
how many assets are invested in model portfolios. Broadridge uses algorithms to
identify clusters and patterns in fund ownership.
Today, the largest model portfolios hold more than $10
billion in assets. The 25-largest providers of U.S. model portfolios were
behind nearly 90% of such assets, according to Cerulli Associates’ analysis of
model portfolios it tracked at the end of 2019.
The asset-management firm BlackRock Inc. recently adjusted
some models to include more environmentally conscious investment exposure after
requests from fund distributors. That helped steer more money into its
sustainability-themed fund lineup over the past year.
Models have been responsible for driving shifts from equity
to bond funds, too. During the pandemic, advisers who used model portfolios
shifted into mixes with a slightly more bond-heavy bent. That is what the tech
firm Envestnet noticed on a portal it runs to help financial advisers manage
client money. There is about $90 billion invested in model portfolios through
Broadridge expects U.S. model portfolio assets to more than
double to $10 trillion by 2025.
Investor advocates warn that the multitrillion-dollar force
comes with risks for consumers. Firms in the model-portfolio business face few
regulations when it comes to reporting performance to potential clients. Some
models contain unproven funds.
“With the reporting standards being less than regulated
vehicles, it is important to do the due diligence,” said Morningstar analyst
Write to Dawn Lim at email@example.com.
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