Model Portfolio Learnings from the United States

• In the United States (US) model portfolio assets grew to an all time high, with the top 50 model portfolio providers responsible for US$2 Trillion¹
• Locally, 2022 was the first year where more than half of financial planners in Australia used managed accounts.²
• We look to the US to predict what’s on the horizon for the Australian Model Portfolio Market.

Across the world, 2022 has been an incredibly challenging year. Global economies faced levels of inflation that they had not experienced in over a decade. Coupled with central bank tightening, and expectations of lower economic growth. Despite the uncertainty model portfolios implemented via managed accounts continue to gain popularity both locally and abroad. Why? By taking advantage of model portfolios, advisers are able to spend more time on client-facing activities. Model portfolios have been instrumental in increasing advisers capacity to spend more quality time with clients, create investment process efficiencies, and grow the menu of services offered — ultimately achieving scale. As the Australian managed account/model portfolio market matures we look to the US to understand what’s next.

Product Development

Risk profiles are where the majority of assets sits for model portfolios in the US. However, providers look to shift their focus to meet a broader set of investment needs. The growth of solutions includes:

1. Outcome-oriented model portfolio, with most strategies designed for generating income.
2. Tax optimisation models, this includes tax awareness using municipal fixed income or low-turnover equity strategies. Alternatively, tax optimisation may be delivered through the technology platform where the models are implemented.
3. Open Architecture, often viewed as a necessary requirement for investment.
4. Incorporation of ESG factors into model portfolios is a key product development initiative. A sentiment resonating locally, where one in five managed account users implement ESG outside of managed accounts. Therefore, there appears to be an opportunity to better align ESG investment through managed accounts.²
5. Provision of end investor information, ensuring that the content supporting model portfolios supports adviser client conversations and is communicated in a manner that can be easily digested by the end investor.

The decision to invest in a model portfolio involves the selection of an investment provider to partner with over the long term. As a result, advisers seek to employ best practices when conducting due diligence on investment providers. In the US asset allocation guidelines are regarded one of the most important sources of information for due diligence. This is information is sourced from a data provider. Further, 61% use internal and external information for due diligence, and the remaining 39% will use internal resources only. Most adviser will use one or two sources of resource as part of their manager/due diligence review process.

Custom Model Portfolios

Custom model portfolios are a growing segment in the US. Custom models are defined as model portfolio created by a model provider at the request of a financial planning business, as opposed to off the shelf models where all users of the model portfolio receive the same allocations. Further a custom model is differentiated to customisation at the adviser level, where the model platform may allow for exclusions of an off the shelf model portfolio investment strategy.

The main reason users are requesting custom models includes fee limitations, manager preference, underlying vehicle requirements, SAA changes and open architecture. Custom models are most often risk based, however, there is a growing need for outcome orientated strategies. In the risk space a model can be built to meet a 5% growth defensive split requirement (i.e. rather than 60/40, 65/35). Further, most custom models will have minimum AUM requirements. Given the large selection of off the shelf models, planners may find that a custom model portfolio is not necessary, but there are many instances where advisers are partnering with asset managers or third party strategist to create custom models.

We believe Australia will follow the US for many model portfolio trends, if it hasn’t already. As US and Australian financial planners pursue a more-holistic, total-financial-health approach. Speak with the State Street SPDR ETFs Team to further discuss how you can apply learnings from the US as you implement model portfolios in your business.