In this Q&A, Mike Martel shares his perspective on the growth of the US model portfolio market.
Managed accounts in Australia represent about $79.3 billion of funds under management1 with a growing proportion accounted for by Model Portfolios. We believe Model Portfolios will continue to gain traction as more and more investment professionals and their clients understand the benefits of model portfolios. To fully understand the possible growth, we turn to the United States market, where Model Portfolios are far more established, and the Managed Accounts industry is a massive US$6 trillion.2
To learn more about what was driving the uptake of Model Portfolios in the US, I spoke with Mike Martel, our Head of Portfolio Management in the Americas and Asia Pacific for State Street Global Advisors’ Investment Solutions Group (ISG). The ISG team is our multi asset class team that manages the State Street ETF Model Portfolios across the globe. At their core, ISG are problem solvers: drawing on their multi-asset expertise, in-depth research capabilities, and rigorous objectivity to construct holistic investment solutions that address a wide and evolving range of investment challenges. This same team manages money for large institutions around the world, including pension funds, central banks, sovereign wealth funds and endowments.
Here are excerpts from that conversation.
Kathleen: US$6 trillion is a remarkable number for the US Managed Account Industry. What do you put as the catalyst for such growth?
Mike: Yes, $6 trillion is certainly a remarkable number. Before I comment on the catalyst for such growth, it might be worth clarifying State Street Global Advisors’ interpretation of the different terminology in the Managed Account/Model Portfolio industry. A model portfolio is a collection of assets owned by the underlying investor and continually managed by professional investment managers. Model portfolios can employ diversified investment approaches, to target a balance of return and risk or portfolio objective. Investors access model portfolios via managed accounts which is a product or service where the underlying securities are owned by the investor.
Now getting back to the US Managed Account Industry. I believe there are several trends in the US retail financial services industry that support the growth experienced by managed accounts including greater demand for fee-based advice, heightened focus on fiduciary relationships, and increasing investor preference for unbiased advice.
Kathleen: And what has this growth meant for Model Portfolios?
Mike: The market has no doubt shifted its perception in terms of the value of financial advice. This shift has encouraged advisers to consider outsourcing portfolio allocation and security selection to allow them to focus more on helping clients meet their financial goals. An outsourced model portfolio offered via managed account supports an improved client experience and can also offer a smoother return stream for investors. Not only does the client benefit from these structures but the advisers do as well, with increased time to focus on client retention and holistic planning. It is really no surprise that managed accounts and model portfolios are gaining so much popularity in the US, as the premise of these structures support a truly fiduciary investment experience while enhancing the potential for business growth.
Kathleen: With the recent market volatility and disruption to business caused by the COVID-19 pandemic, have these structures continued to gain traction in the US?
Mike: Kathleen, it’s interesting you raise this, and the answer is yes. In the US, the first quarter of 2020 was our best quarter for model portfolio inflows yet. It appears this market disruption has been a catalyst for advisers to adopt a model-based solution in their practice. This environment has highlighted the importance of frequently engaging clients. Clients really value timely communication from their adviser. Engagement could be an update regarding the market volatility and the impact this has to a client’s holding or it could be as simple as providing reassurance to a client in these uncertain times.
Kathleen: Industry research suggests the US Managed Accounts will continue to grow and is likely to be worth a staggering US$ 10 trillion by 2022. Where do you think the market will innovate in the coming years?
Mike: In the US, ESG investments and solutions that provide reliable income are areas where we expect product innovation.
Advisers are seeking better solutions that address the growing need for ESG investing. I wouldn’t be surprised if this investment need translates to innovative ESG managed account solutions in the coming years.
In addition to ESG, generating stable income remains a challenge for advisers, specifically for their retiree clients. As Baby Boomers move deeper into retirement the challenge becomes even more important to solve. To date model portfolio providers offering annuities in managed accounts, have failed to gain traction. Also, as interest rates remain low this fosters a disappointing yield environment for traditional income generating assets. One income generating solution is a multi-asset income portfolio that considers overall portfolio volatility and risk. In the coming years I think we will continue to experience more innovative income portfolio solutions in the managed account space.
In addition to these investment themes advancement in technology have increased the ease in which investors and advisers can access model portfolios. I believe we will continue to experience the “democratisation” in model portfolios as more Robos enter the managed account market.
Kathleen: Are there any obstacles or headwinds you think may challenge the growth or adoption of Model Portfolios in the US?
Mike: Still, many advisers are reluctant to adopt model portfolios through managed accounts. Some advisers believe that models may limit their ability to customise and personalise client portfolios. Likewise, many advisers are concerned that outsourcing portfolio management means assigning a critical role to someone else, thereby diminishing an advisers’ value proposition for clients and prospects.
However, many model or managed account users have articulated that outsourcing portfolio management doesn’t diminish their role in the eyes of their clients. In fact, it may help strengthen a firm’s value proposition by providing time to develop deeper adviser-client relationships.
Outsourced portfolio management is an investment responsibility, as it is involving the selection of third-party investment managers with the capabilities to complement all or part of your client investment solution. I believe as more adviser appreciate this concept we will see even greater growth in model portfolios implemented through a managed account.
Kathleen: Are there any other interesting themes we could learn from the US managed account experience?
Mike: Let’s touch on two.
Firstly, we are seeing an increase in the US in the number of advisers articulating the need to increase efficiency and streamline their business in 2020, with a specific focus on the managed account structure in which they will offer model portfolios to their clients. Considerations include the use of a consolidated platform, the notion of a single sign on and a holistic firm view that can pivot down to an individual client account. It’s important for model portfolio providers to appreciate this and provide intuitive portfolio solutions which advisers can easily explain and use for their clients’ investments.
The second theme that is becoming more apparent is a demand for low cost ETF model portfolio solutions provided by Asset Managers. Specifically, over the last three years I have noticed significant compression of investment advisory fees. The adviser is no longer willing to accept any perceived “additional fees” other than the underlying cost of the investment vehicles within the model portfolio. This trend is something we have taken into consideration when developing the State Street ETF Model Portfolios.
Kathleen: Thank you for your time, Mike. It is certainly exciting to see how model portfolios have grown in the US and gives us insights as to what we can potentially expect to see here in Australia.
Mike: Additional information on the model portfolio landscape can be found here. You can also learn more about the State Street ETF Model Portfolios here.
1 December 2019 IMAP/Milliman managed account FUM census.
2 The Cerulli Report U.S. Managed Accounts 2019
The views expressed in this material are the views of Mike Martel through 18 June 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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