Twenty years ago, exchange-traded funds (ETF) were introduced to Australia. Since then, they have helped democratise the investing ecosystem, enabling the ordinary investor to obtain straightforward, low-cost, and diversified exposure to various asset classes. $113.5 billion worth of assets were invested in over 223 listed ETFs as of 30 June 20212.
To be truly diversified, investors must hold investments across asset classes. An efficient and cost-effective way to do this is to construct a portfolio of ETFs that spans a variety of holdings. Determining this mix is often the purview of the financial adviser. Yet, even with professional assistance, this can still be a time-consuming task.
Fortunately, advisers now have access to a range of institutional grade “done for you” diversified model portfolios that can be immediately implemented with managed accounts.
Model Portfolios 101
Model portfolios are pre-packaged portfolios consisting of a variety of underlying funds. Each portfolio can have a distinct goal – for instance, high growth or a steady income. These objectives determine the broader asset allocation structure and the type of funds used to achieve this. All this is set by an investment manager, who is also responsible for the ongoing management, including rebalancing the portfolio.
However, unlike ETFs and managed funds, model portfolios are often not directly available to retail investors. In Australia, managed accounts – a product or service where the underlying investments are transparent to the investor but managed by an adviser – are the predominant vehicle for implementing model portfolios.
Why are model portfolios so attractive from an adviser perspective? They offer a few key benefits, namely:
A Fast-Growing Landscape
In the US alone, there is an estimated US$4.1 trillion worth of assets invested in these model portfolios – a figure expected to hit US$10 trillion by 20253. In Australia, managed accounts held AU$95 billion of assets as of the end of 20204 and are on track to be the dominant investment structure within financial planning practices over the next decade.
Research shows that 70% of Australian financial planners already use or intend to use managed accounts – a 25% increase over the past five years. Furthermore, planners expect almost a quarter of new client inflows to go to managed accounts by 20245.
However, not all model portfolios are created equal.
ETFs in Model Portfolios – A Natural Synergy
Model portfolios can be constructed with managed funds or ETFs. Currently, out of 1,003 unique model portfolios available in Australia, about 12% use ETFs as their building blocks6. We expect this figure to grow to at least 30% within the next five years.
The Growth Engine of Model Portfolios
The alignment between the structure of ETFs and model portfolios makes them a logical fit. Therefore, we believe ETFs will be responsible for most of the growth of model portfolios moving forward.
After all, ETFs themselves have seen the highest growth in the past five years as investors have become increasingly aware of the impact of fees on returns. There are now over a million ETF investors in Australia . This trend is likely to be reflected in model portfolios – which is excellent news for Australian investors who can enjoy fully diversified and low-cost investment portfolios.
1 Broadbridge, December 2020.
2 ASX Investment Products Report, June 2021.
4 Source: Institute of Managed Account Professionals (IMAP) and Milliman, as at 31 December 2020.
5 Source: SPDR ETFs / Investment Trends 2021 Managed Accounts Report. The SPDR ETFs / Investment Trends 2021 Managed Accounts Report was commissioned by Investment Trends. The survey was carried out between December 2020 and February 2021. The sample of 905 respondents includes RG146 compliant financial planners, accountants and dealer group managers who personally provide advice.
6 Rainmaker Advantage, December 2019.