Model portfolios are a new generation of investment products that can help wealth advisors improve client outcomes, refocus their attention on high-value activities, and ultimately expand their businesses cost effectively. Demand for model portfolios has grown rapidly in recent years, driven by their efficient implementation by wealth advisors and their strong performance on behalf of advisory clients. “We’ve seen total capital in model portfolios increase from about $3.1 trillion to $4.2 trillion in the last year alone,” says Rob Eckrote, vice president at BlackRock, in a recent interview.1 And by using models rather than hand-crafted portfolios, advisors may be able to reallocate their time to higher value activities without sacrificing performance, says Eckrote.
If selected and configured wisely, model portfolios can deliver institutional-grade solutions in a cost-effective way. As the breadth of these products widens, advisors may be able to increasingly serve their current clients and expand their practices with new ones.
Improving client outcomes with diverse model offerings
A broad model offering can allow advisors to provide their clients with investment solutions tailored to their unique investment objectives. Model portfolios are seldom a one-size-fits-all financial product, and as a result, wealth advisors frequently blend several models to deliver the risk, return, cash-flow, and liquidity that aim to meet clients’ objectives. In a recent survey conducted by Institutional Investor (II) and BlackRock, one-third of wealth managers say they always supplement their core model allocation with models from other providers in client accounts, and another 49% do so frequently. These and other findings were published in September 2024 in Model Portfolios: A New Generation of Investment Solutions for Wealth Managers and Their Clients.
The reasons behind blending several models are many. Two-thirds of wealth management respondents say they blend models to provide additional asset exposure, for example, by combining a long-term growth model with another model focused on a particular region. A majority of respondents (52%) say they blend models to gain access to complementary investment approaches such as active, factor, or income-focused strategies. Advisors blend models to diversify the business risk inherent in concentrating holdings with one advisor and to show clients the scope of their portfolios’ composition.
Enhancing advisory practices through broader offerings
Expanding model offerings can help streamline portfolio management, allowing advisors to focus on comprehensive, holistic financial planning. Part of this process is the blending and customization of models, and another is utilizing diverse platforms and TAMPs.
Advisors source models through platforms like Adhesion Wealth Manager Exchange and Envestnet, used by 52% and 42% of advisors respectively. These platforms provide a wide array of models where advisors and wealth managers can select models from various model providers. The technology underlying model portfolios developed rapidly over the last decade, and advisors now have a vast array of model portfolios to choose from. Amid this embarrassment of riches, advisors often wrestle with decisions about which model portfolios are especially well suited to a given client’s needs.
“The industry needs to do a better job, because right now there aren’t enough good or easy ways to compare portfolios as there are, let’s say, to compare ETFs where you can go in and compare one ETF versus another,” says Nate Thooft, chief investment officer and senior portfolio manager of multi-asset solutions at John Hancock Investment Management.
Some industry participants have begun filling the gap. BlackRock’s Advisor 360 tool allows wealth managers to see a curated list of third-part asset manager models arrayed against similar BlackRock models. This platform also provides for comparison of models against a suitable benchmark for the clients’ entire portfolio. BlackRock says this comparison and integration platform is among the first of its kind to be made available to wealth managers. Eckrote adds “We’re trying to improve that technology every day, but there’s still a great deal more to do.”
Model portfolios can support practice expansion and client acquisition
A well-designed model offering can help advisors strengthen relationships with their current clients and liberate them to spend time and attention attracting new ones.
“Many advisors initially used models for smaller accounts to improve efficiency,” says Kelly Campbell, multi-asset solutions lead at Capital Group. “Internal survey data then began to indicate that those advisors using models, on average, also build deeper client relationships and have better retention. This mutual benefit has likely been a driving factor in the growth of models as more advisors use them for a broader range of clients.”
In the II/BlackRock study, a majority of clients and advisors express significant interest in additional services like tax advice, planning, and budgeting, providing opportunities for advisors to diversify their offerings.
Models, and the customization of their features, have the ability to play a large role in minimizing client tax burdens. “Model providers are increasingly leaning into tax optimization, and they could really help their clients systematically harvest tax losses throughout the year,” says Eckrote.
Tax-loss harvesting used to be a process by which advisors would offset capital gains with capital losses in an attempt to minimize a client’s tax burden, usually at the end of the year. Sophisticated model portfolios are able to integrate this process so that “ it’s an ongoing process that leverages technology to seek results for clients throughout the entire year,” says Eckrote, adding that 89% of clients request tax-optimized models.
Demand from clients for tax optimization presents an opportunity for advisors and their businesses. While in the past this side of financial planning was ordinarily left to accountants, advisors can now leverage technology to offer more to their clients in the form of holistic financial planning. A larger offering can lead to more clients as advisors can now offer more services.
Ultimately, the use of models can allow advisors to have more time with their clients, a valuable component to strengthening relationships. Advisors are increasingly utilizing models to lighten the burden of the often-tedious investment management piece of the greater financial planning picture. “By doing so, the advisor frees up tremendous time that allows them to focus on what’s important – developing new relationships with prospective clients and maintaining strong relationships with existing clients, all while leaning into value-added services like holistic financial planning,” says Eckrote. The combination of more clients who are satisfied with the service they’re receiving leads to an increase in client retention, which eventually translates to better economics all around.
Sound economics seems to be one of the driving forces behind advisors’ increased demand for an ecosystem of models as well.
“Retention is an attractive characteristic of model portfolios, but it must be earned,” says Campbell. “Model managers need to offer effective servicing to assist advisors in clearly communicating the portfolio’s structure, the rationale behind changes, and the primary investment drivers.”
The results for many advisors have been rewarding. Models have produced larger tickets that have been held for longer, resulting in better economics, more time for advisors to serve and acquire clients, and ultimately more opportunities to expand their businesses.
1 Source: Cerulli, U.S. Asset Allocation Model Portfolios, 2023.
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Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns.
The BlackRock model portfolios are provided for illustrative and educational purposes only. The BlackRock model portfolios do not constitute research, are not personalized investment advice or an investment recommendation from BlackRock to any client of a third party financial professional, and are intended for use only by a third party financial professional, with other information, as a resource to help build a portfolio or as an input in the development of investment advice for its own clients. Such financial professionals are responsible for making their own independent judgment as to how to use the BlackRock model portfolios. BlackRock does not have investment discretion over, or place trade orders for, any portfolios or accounts derived from the BlackRock model portfolios. BlackRock is not responsible for determining the appropriateness or suitability of the BlackRock model portfolios, or any of the securities included therein, for any client of a financial professional. Information concerning the BlackRock model portfolios – including holdings, performance, and other characteristics – may vary materially from any portfolios or accounts derived from the BlackRock model portfolios. There is no guarantee that any investment strategy or model portfolio will be successful or achieve any particular level of results. The BlackRock model portfolios themselves are not funds. The BlackRock model portfolios include investments in shares of funds. Clients will indirectly bear fund expenses in respect of portfolio assets allocated to funds, in addition to any fees payable associated with any applicable advisory or wrap program. BlackRock intends to allocate all or a significant percentage of the BlackRock model portfolios to funds for which it and/or its affiliates serve as investment manager and/or are compensated for services provided to the funds (“BlackRock Affiliated Funds”). BlackRock has an incentive to (a) select BlackRock Affiliated Funds and (b) select BlackRock Affiliated Funds with higher fees over BlackRock Affiliated Funds with lower fees. The fees that BlackRock and its affiliates receive from investments in the BlackRock Affiliated Funds constitute BlackRock’s compensation with respect to the BlackRock model portfolios. This may result in BlackRock model portfolios that achieve a level of performance less favorable to the model portfolios, or reflect higher fees, than otherwise would be the case if BlackRock did not allocate to BlackRock Affiliated Funds.
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Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.
There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.
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