As advisors increasingly outsource investment management to focus on things like financial wellness, comprehensive planning and growing their businesses, fintech firms are introducing new ways to meet the demand beyond digital model portfolio marketplaces.
Morningstar announced earlier this month that it would bring new data, research and its popular star rating system to the growing model portfolio ecosystem. The company is also adding a new Model Exchange to its Advisor Workstation, which advisors can use to analyze, compare and subscribe to 2,100 models. Wealth management firms can also use the platform to manage proprietary models alongside third parties.
Meanwhile, Betterment for Advisors has automated the
Data on model portfolios can be hard to come by as many asset managers either cannot track assets invested into a model or do not want to publicly disclose the data, but Morningstar conservatively estimates $315 billion of assets followed a model portfolio as of June 30, 2021. And the number of options continues to surge, with Morningstar reporting it collected data on 1,000 new models in less than a year with only a modest increase in outreach, the company said.
“The trajectory for continued model growth is very strong,” said Jason Kephart, a strategist for Morningstar’s multi-asset and alternative strategies research group. “Most advisors are using [them] as an easy button to outsource investment allocation.”
Asset allocations models are only the beginning, Kephart added. Adoption will only accelerate as the models get easier to customize with direct indexing, technology that is currently
But model providers don’t have to provide the same sort of data that is required of mutual funds or ETFs, said Michael Herbst, Morningstar’s director of models and institutional investments. The result is inconsistent data that makes it difficult for financial advisors to do apples-to-apples comparisons.
The hope is that greater transparency into model portfolios — including assets under management, asset allocation targets and ranges, rebalancing frequency and fees — can lead to the same kind of standards that exist with other investment products, Herbst said.
“It’s clear based on reports and commentaries coming out of the SEC that they will be focusing on models much in the same way that folks might have been focused on mutual funds or ETFs [when they were new],” Herbst said.
The most recent research available from Cerulli Associates found that around 16% of financial advisors in 2020 use asset allocation models as their primary method for portfolio construction. While that number is likely to be higher in 2021, there is still a lot of resistance in the industry, according to Brendan Powers, Cerulli Associates’ director of product development.
Morningstar’s update could solve one of the biggest headaches — simply getting information about available model portfolios in front of advisors, he said.
“Think about what Morningstar does for mutual funds and ETFs. They are the go-to fund ratings for many advisors,” Powers said. “For advisors who need help sifting through the available options out there, it’s good for the overall experience.”
Yet other obstacles are more behavioral in nature. There are perceptions throughout the industry that models add a layer of fees and just can’t meet clients’ needs, Powers said. The ongoing proliferation of models and greater ability to customize them should address the latter, while improved data on models such as what Morningstar is doing can alleviate concerns about cost.
But sales and investment management remain many advisors’ bread and butter, and that might be a higher hurdle to widespread adoption.
“A lot of advisor practices still have a value-add rooted in investment products and feel they need to have some hand in the mix in order to substantiate the fees they charge their clients,” Powers said.
Betterment’s latest update to its for-advisors platform could be a step toward reaching this crowd. In February, the company made a significant shift in strategy by allowing RIAs to hand a custom-built model portfolio (with at least $2.5 million invested) to Betterment’s trading team, which would upload it into the robo’s algorithms. Instead of being forced to choose from a menu of pre-built strategies, advisors could get the advantages of digital advice — tax-loss harvesting, automated rebalancing and asset location — while still adding their secret sauce investing strategies.
Now the company is dropping the minimums with a new feature that lets RIAs upload a model portfolio to the robo themselves. Instead of handing the model over to Betterment’s developers, advisors can select from a menu of 1,500 ETFs to craft as many custom model portfolios as they like, set asset weights and up to 10 different risk levels, and instantly assign clients to the model. Soon, advisors will even be able to edit the software’s capital market assumptions if they disagree with the robo.
The algorithm handles the rest, and all of it feeds into the client experience, goals tracking and reporting.
“It’s a sneak big move for us,” said Jon Mauney, the general manager of Betterment for Advisors. “It’s not 'our way or highway.'”
Betterment will also help with a migration strategy for advisors looking to move a client into a model portfolio, and show an estimated tax impact.
“Advisors can see what they’re getting into before actually giving it to the client,” Mauney said.
After a month in beta testing, advisors are using it to create more bespoke portfolios for individual clients’ needs, Mauney said. And because they are custom-built rather than a marketplace of third-party models, advisors rooted in investment management can still show off the value expertise.
Ross Gott, the president of ZeroCelsius Wealth Studio, a New London, New Hampshire-based RIA with $85 million of assets under management, said he’s created 10 risk profiles on a custom strategy for some of his smaller clients. The difference between Betterment’s new service and the previously available customization options is “night and day,” he said.
“I can go in and create the models within a matter of minutes,” Gott said.
And the ability to quickly build a custom portfolio for just about every client can go a long way in helping advisors embrace model portfolios, he added.
“Most of the advisors I know already have their own models, or they’re using somebody else’s models that they’re customizing,” Gott said. “I’ve got regular models and ESG models, each with 10 risk profiles. It makes it so damn efficient from a practice management point of view.”
