It’s no surprise model portfolios continue to gain traction as they support advisers to enhance business efficiency and attract new clients. Locally managed accounts exceeded $100 billion in assets for the first time in 2021.2
Despite the market disruptions of 2021, model portfolios implemented via managed accounts continue to gain popularity both locally and abroad. This is due to the wide range of benefits they provide clients and how they have assisted advisers in propelling growth in their practice.
In the United States (US) the number of services clients expect from their advisers has shifted from nine to 16 in the past five years. But the number of hours in a day remain the same. With a shift in client’s expectations advisers are broadening their services beyond investing. This more holistic approach should lead to long-term client relationships. Given this shift, it’s no surprise that the US has experienced tremendous growth with US$9.1 trillion1 invested in models as advisers look for greater efficiencies within their practice. This growth can be attributed to the fact that the adviser who may have once resisted adopting model portfolios five years ago is now using them for clients of all shapes and sizes. As advisers experience the benefits first hand for smaller balance clients, we are seeing their adoption expand to larger balance clients.
We expect this growth to continue in 2022, and here are four reasons why.
1. Customise Your Portfolio
Through the introduction of customised portfolios we expect to see the application of model portfolios expand as advisers use these structures for different client types. An example of a customised portfolio is where an adviser elects to not invest in a specific security in the model portfolio and the managed account platform automatically rebalances to the remaining assets in the model. This allows advisers to use model portfolios for more of their clients, as they have the option to tailor the portfolio allocation to specific client investment needs. However, advisers are cautioned to consider the cost of customisation, and to not detract from the efficiencies gained from model portfolios. For example, any commentary provided by the model portfolio investment manager would be less relevant given the change in asset allocation.
2. Blending Passive and Active
As cost remains front of mind for advisers and their clients, 62% of model portfolio providers in the US are developing strategies that blend active and index products to meet market demand and create lower cost models.1 With the introduction of these strategies advisers are more attracted to the model portfolio investment proposition as it keeps costs down for their clients.
3. The Value of Values
Today, issues like climate change, information security and gender diversity are placing a spotlight on the importance of environmental, social and governance (ESG) investing. Clients are seeking support to understand how to blend their values and investments. Model portfolios offer a solution to advisers by taking the burden of product selection away and articulating the approach to ESG investing. In Australia close to 30% of advisers say they would like to see more responsible investments type managed accounts.3Therefore, we expect this investment need to translate to an increase in ESG model portfolios solutions in 2022.
4. Outsourcing Portfolio Construction
In the US, US$1.9 trillion of intermediated assets is in outsourced model portfolios.1 Advisers outsource portfolio construction with the goal to increase practice margins, especially for lower balanced clients. Further, as advisers shift their businesses to focus on other financial and advanced planning capabilities, the adoption of outsourced model portfolios seems more feasible. Outsourced portfolio construction is also expected to increase as those that insource model portfolio construction have greater staffing costs to support investment selection.
However, outsourcing investment management is not for all advisers. For those that seek control, insourcing portfolio construction for model portfolios remains the preferred approached. The COVID-19 pandemic saw many advisers in the US pause any transition and this slowed the conversion of insourcers to outsourcers, as adviser sought to keep control during periods of significant market volatility. However, many of the outsourcers implementing model portfolios via managed accounts in Australia experienced a more positive impact to their value proposition throughout the COVID-19 pandemic compared to those that insourced portfolio construction.3
In the pursuit of a more-holistic approach to financial planning many advisers turn to outsourced model portfolio solutions, as this allows advisers to free up the necessary time and resources to evolve their practice. Therefore, as adviser transition their practices toward growth drivers and the model portfolio landscape matures we expect more adviser practices to adopt outsourced model portfolios.
What’s clear from these four trends is that managed accounts are not just here to stay, they are revolutionising adviser practices and continue to do so through product development.
1 U.S. Asset Allocation Model Portfolios, Cerulli 2021.
2 AP Milliman Managed Account FUM Census as at 30 June 2021.
State Street Global Advisors defines a model portfolio as a collection of assets owned by the underlying investor and continually managed by professional investment managers. Model portfolios employ a diversified investment approach to target a particular balance of return and risk or portfolio objective.
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