Exchange traded fund model portfolios have helped advisors during the Covid-19 pandemic, March’s market collapse, and the subsequent recovery.
In the recent webcast, Optimizing Your Investment Process with Model Portfolios, Brendan Powers, Associate Director, Product Development, Cerulli Associates, explained that asset allocation strategies provide advisors with a full or partial portfolio solution through exposure to several investment strategy components, including ETFs and mutual funds. Powers pointed out that roughly 43% of practices use models as a starting point to build client portfolios, which covers 33% of assets.
“We see advisors slowly increasing their use of models because they feel that the added benefits of having more time to focus on other aspects of their business (e.g., business development, professional development, financial planning) and the ability to provide a more uniform investment experience outweigh the perceived challenges,” Brie Williams, Head of Practice Management, State Street Global Advisors, said.
The average financial advisory practices allocate 23% of their time to portfolio management. However, by incorporating a model portfolio into an advisory practice, Williams argued that the extra time could translate to a 45% increase to deepen relationships with existing clients and a 54% rise in the time allocated to prospecting new clients.
“While financial and investment planning is at the core of a financial advisor’s value, the practice still has to balance the time spent between day-to-day investment management and building client relationships,” Williams added.
David Marshall, ETF Model Portfolio Strategist, State Street Global Advisors, also underscored the improved time efficiency of incorporate model strategies as model users typically spend 8.5% of their time on investment activities, compared to 17.5% for manual users.
To help financial advisors categorize the types of best ways to utilize model portfolio strategies, Powers highlighted four optimal advisor portfolio construction segments, including Model Users, Model Targets, Mosaic Users, and Insourcers or non-users.
The majority of financial advisors fall into the Model Targets segment, where advisor practices primarily rely on external models but make modifications to fit client needs or practice preferences. It also includes advisor practices that currently act as insurers but lack the capabilities to do so and are more likely to be influenced to adopt models over time.
Model Users or advisor practices currently use models suggested by the B/D, custodian, or third-party provider without modification and will continue to do so.
Mosaic Users are advisor practices that use inputs from various sources, including paper models, third-party or B/D models, and internal strategies. These advisors likely should be leveraging asset allocation models but are unlikely to outsource discretion.
Lastly, Insourcers are larger, sophisticated advisor teams that frequently employ a CIO and are qualified to build their own custom models or portfolios for clients and will continue to do so
Williams also pointed out that investors with assets in model portfolios are significantly more likely to agree that their advisor understands their goals, that they trust their advisor, and that their advisor is an integral partner in their financial life.
“Advised investors with assets in model portfolios are sophisticated enough to recognize the benefits. They support the use of model portfolios and report positive impacts related to performance, risk, and fees,” Williams said.
“These client experience findings indicate that outsourcing portfolio management doesn’t diminish the advisor’s role in the eyes of the client. In fact, it may help strengthen a firm’s value proposition by allowing for deeper advisor-client relationships,” she added.
Marshall also highlighted the importance of properly identifying model providers through a product-centric lens that includes the provider’s philosophy and process, performance, price, and people involved. Additionally, investors should also consider the firm-centric lens that includes the provider’s reputation, transparency, communications, and resources available.
State Street offers a range of ETF model portfolios, crafted by experts with each one designed and managed by the Investment Solutions Group. The strategies are backed by more than 50 portfolio managers, strategists, and analysts, covering a range of investment outcomes to provide diversification opportunities across various asset classes and risk profiles.
For example, the Strategic Asset Allocation Portfolios pursue optimal capital efficiency over a long-term horizon.
The State Street Active Asset Allocation ETF Portfolios seek to capitalize on short- and long-term mispricing in the global equity and fixed income markets by overweighting asset classes that appear attractive and underweighting less attractive asset classes.
The State Street Tax-Sensitive ETF Portfolios include two suites of risk-based models that seek to capture the potential tax advantages of municipal bonds.
The State Street Tactical ETF Portfolios include three tactical portfolios that aim to outperform strategic benchmarks in all market conditions.
They also provide Outcome-Based and Specialized ETF Portfolios that solve for a range of investor needs and desired outcomes, such as the State Street Global Allocation Target Risk ETF Portfolio, State Street US Equity Sector Rotation Target Risk ETF Portfolio, State Street Flexible Allocation ETF Portfolio, and State Street Income Allocation ETF Portfolio.
Financial advisors who are interested in learning more about investing with model portfolios can watch the webcast here on demand.