MASTERCLASS: Model Portfolios

  • |
  • 58 mins 45 secs
Experts discuss the use case for model portfolios, why there is a desire for them in the marketplace, and some of the ways they can achieve excess returns. The panelists cover demand & advisor adoption, look at the current model landscape, and explore some of the latest innovations and developments.
  • Seth Buks, CIMA, Client Portfolio Manager, Columbia Threadneedle
  • Suzanne Daly, Product Area Leader, Proprietary Models & Wealth Advisor Solutions, Fidelity Investments
  • Joshua Greco, Vice President, Head of Institutional Portfolio Management, Franklin Templeton Investment Solutions
  • Brian Kmetz CFA®, CIPM®, Vice President and Portfolio Manager, Natixis Investment Managers Solutions


In order to access this quiz you need to provide the following information:

You need to provide at least one CE Accreditation number: *

Please take a moment to provide some detailed feedback on the presentation:

Jenna Dagenhart: Hello, and welcome to this Asset TV Model Portfolio's Masterclass. We'll cover demand and advisor adoption, look at the current model landscape and explore some of the latest innovations and developments. Joining us now, we have Suzie Daly, product area lead, wealth advisor solutions and model portfolios at Fidelity Investments. Josh Greco, vice president, head of institutional portfolio management at Franklin Templeton Investment Solutions. Seth Buks, a client portfolio manager at Columbia Threadneedle Investments, and Brian Kmetz, vice president and portfolio manager at Netixis Investment Managers. Josh, setting the scene for us here, what is the use case for models?

Joshua Greco: Yeah, and it's a great question because it is certainly an industry trend to start increasing the utilization of model portfolios. There are three reasons that I think are really the case for models. First off is convenience. Many of these are being published on platforms in which it quite literally is a single click election to participate in a model portfolio provided by an asset manager. Consistency is the second thing that always comes up. Across an advisor's book now, you can really keep clients consistent by risk profile, by using model portfolios without having to tailor an individual investment plan for each client. And scale is the third thing that always comes up in every conversation. You're not building those fresh allocations, you're not having to go out finding fresh underlying funds to invest in, and you can really think about how every account fits into a given risk profile without going back to tilt or trade or create a custom account at every level for every client.

Jenna Dagenhart: Seth, turning to you, could you define what you think there's a desire for model portfolios in the marketplace?

Seth Buks: Sure. We have this mantra here at Columbia, really for our value add programs and that is grow, protect, connect. That's really the goal of our sales teams when they're delivering value add content to help advisors grow their practice through business building ideas, protect the assets they currently have with due diligence tools, and connect more deeply with clients through various seminars. I would say the same is true for model portfolios in the marketplace, broadly speaking. What they can offer is a way to help advisors grow their practice, protect the assets that they currently have and have more time to connect with clients. There's recognition in the industry that the reason that clients engage with advisors really has changed. Sure, some clients still want just stock picks or trade execution, but I would say most clients are now much more interested in creating a financial plan, getting help sticking with that plan, having someone to talk to about their goals and understanding their family needs.

And studies have shown that this is really what clients actually believe they are paying for, or in other words, where they believe their fee is going. Then they're placing less emphasis and less dollar value on the investment management component. The role of the advisor has really moved closer to that of a financial or even a behavioral coach. And so if you think about it from a time allocation perspective for advisors, model users spend less than 10% of their time on those investment management activities compared with over 20% of their time for FA's who create model portfolios in their practice, or even create custom portfolios for every client. All this time spent on investment research, due diligence, trading, rebalancing really leaves less time to focus on financial planning, which is again, where most clients see the most value. And of course from advisor, prospecting for new clients. I guess to come full circle to where I started, why have they become so popular? Well, they can help advisors grow their business through better time allocation, protect the assets they currently have with a potentially more consistent process, and then of course have more time to connect with their clients and meet their needs beyond just investment management.

Jenna Dagenhart: And Brian, what are some of the ways to achieve access returns using models?

Brian Kmetz: Yeah. I think the access returns proposition for models, one comes from just the scale of resources, the breadth that these asset managers can bring to model portfolio construction. And when you peel back the layers on that, we're really looking at it from three different angles. There's strategic allocation, on top of that, there's a tactical and then manager selection. And so you really want to make sure that each of those layers can really add value. For the strategic, you're generally looking out, depending on your timeframe 10 years, it can be as short as five years, but you want a longer term time horizon that's generally over the course of an investment cycle. And then the tactical, you're tilting more shorter term. And so you're hoping to take advantage of those shorter term dislocations. And then finally with manage your selection, you're looking to find managers that will outperform over full market cycles and provide diversification. That's a lot of moving parts. And like I said, you really want to understand the process, you want to understand how your model portfolio provider is measuring those contributions from an attribution perspective, and you want to make sure that it's constantly being reviewed and understood by the end advisor so they can relay it to their clients.

Jenna Dagenhart: Suzie, could you frame the model ecosystem and how fidelity looks at the model portfolios landscape?

Suzanne Daly: Yeah. I really like to take a step back and think about where model portfolios play in the ecosystem that we all live in today. And I really think about it as a triangle. If you start with the buyer, the gatekeeper, I think about how are these model portfolios being considered from a broker dealer, a sponsor, an REA perspective, how are they thinking about utilizing them and distributing them to advisors? And so oftentimes the conversation is, do we want to try to provide turnkey scalable solutions or is this consumer thinking about it more of a personalized approach? They want to try to assume an institutional asset manager's point of view, brand that and distribute that out to advisors or somewhere in between. I think about it from the broker dealer REA perspective as one point in this conversation. And then I think about who is the TAMP, the turnkey asset management provider, the FinTech player, or is this even being distributed as a paper model portfolio, which we'll talk about in a little bit? And how is this model portfolio going to be rendered and consumed for advisors to pull down and take advantage of?

And then lastly, as the advisor, what type of advisor do you identify with? Is this an advisor that likes to outsource their investment management capabilities to go deeper and personalize their engagement with their clients? Is this somebody who is an engineer and likes the real craft of portfolio construction and delivers alpha three portfolio construction, or again, is this advisor somebody who identifies somewhere between, as a customizer, maybe likes to think about pulling down a model portfolio, customizing that, then distributing that to their end client in a scalable way. Again, coming back to the full circle, broker dealer sponsor REAs, and then FinTech TAMP providers or paper model users, and then advisors, the end consumer, and how do they identify as a model consumer, as a engineer, an outsourcer or a customizer.

Jenna Dagenhart: Now, Josh, what are some of the frequently asked questions that you're getting around models?

Joshua Greco: Yeah. And so models are a rather new innovation within wealth management and certainly a newer tool for a lot of financial advisors, particularly in the retail and REA space. And if you went back 30 years, these would've been really delivered as fund to funds in which you got a single ticker, it was generally a mutual fund of mutual funds. And fast forward to where we are today, many of these models are delivered as separately managed accounts to different platforms. They're generally using mutual funds and ETFs in concert to deliver an outcome of the sought risk return profile that the advisor is seeking in a given model. There are a lot of questions that regularly come up as you are now creating sort of a new vehicle for delivery in these strategies. And I'll just run through a couple that I get on a fairly regular basis.

And the first one is minimums. Minimums always come up when we're talking model portfolios. And it's a really important question because it boils down to the advisor's ability to do business in the model portfolio and they're thinking through what clients qualify or do not qualify for a given model portfolio. And so minimums, thankfully in model portfolios, are typically pretty low, especially when using mutual funds and ETFs together. You can generally, as an example, create minimums as low as $25,000 that advisors can take advantage of, which really allows their whole book to take advantage of model portfolios in many instances. Minimums always comes up. Manager selection. Can't emphasize how many questions I get on, how do you select the underlying funds or underlying ETFs that you allocate to. And speaking for what we do within Franklin Templeton Investment Solutions, we have an in-house manager research team that helps us research and cover all of the underlying strategies we allocate to.

Providing deep due diligence on the managers that we elect to allocate to, we think is a net benefit and really sures up that manager's selection conversation when we have it. Trading frequency. Brian was speaking earlier around the ability to contrast strategic and tactical time horizons when looking for market dislocations, that all has to be teed up with the advisor. You absolutely want to manage expectations around trading frequency and turnover. At Franklin, our approach is really a dynamic asset allocation approach. A timeline sort of that fits in between the longer term strategic and the much shorter term tactical. In our models, you'd be typically looking at trades four to six times per year, but certainly you want to get that expectation out there with the advisor, particularly if they have taxable money that will be applied to your model portfolio program, you want to make sure they know what the potential for turnover is.

And that leads right directly into the final point on taxation. What's really great about model portfolios is that they are often delivered as separately managed accounts, which means that the client actually owns the underlying cost basis of all the underlying positions in a given model. This really creates a great conversation when the advisor asks about any management done for tax efficiency or tax loss or tax optimization. And it's really difficult to do that when the client owns the underlying cost basis of a given position, depending on when, in a given year, they incepted that position or how long they've held an underlying position can really determine whether they would be selling at a gain or at a loss. While we are of course, conscious of what's going on in the market, for us to trade on taxation purposes, we generally leave that to the platforms and platform technology to make any tax decisions on behalf of their underlying clients who own that particular cost basis.

Minimums, manager selection, trading frequency, and of course taxation are things that always come up. They're on my FAQ list and I'm sure many of my co-presenters on this panel would agree that those are things that are regularly discussed in client meetings.

Jenna Dagenhart: Mm-hmm. Now, I want to go around the room and have everyone share a little bit more about your various approaches. I'm sure there'll be plenty of overlap here, but Suzie, could you help introduce our viewers to Fidelity, how and when you brought model portfolios into the market, how they've done, who your clients are, et cetera.

Suzanne Daly: Fidelity Institutional entered the model portfolio space back in 2018, so little over four years ago. Fidelity Institutional serves the intermediary marketplace. That's broker dealers, REAs, family offices. We don't service the Fidelity retail channel that everyone knows of, or the Fidelity workplace channel. We do service our primary clients or both our clients that clear in custody with Fidelity, as well as those that do not clear in custody with Fidelity. As far as our model portfolio offering though, it's fairly extensive and it follows a large spectrum of capabilities. Generally speaking, however, our model portfolios tend to be active, passive, blend, and they're all non-discretionary in that we provide them to platforms in a non-discretionary manner. We have actually the benefit of four different asset managers or manufacturers within the Fidelity compound that provide manufacture models for our lineup. And those models kind of span six different families if you think about it.

Over 80% of our flows, I would say, go into our primary target allocation suite. We tend to think about our target allocation suite as the primary flagship offering that we provide in the marketplace. And then we have tilts to that core as you think about it. We started four years ago or so in a proprietary fidelity active and fairly index position, target allocation model portfolio. And then we opened that up to be more of a multi-manager approach again to the target allocation, active passive, multi-asset class model portfolio. And then we introduced a low cost index version, a tax aware version, and now even a unified managed account, a UMA version of that target allocation suite. There's a lot going on there within the target allocation family in and of itself. And then in addition to target allocation, in addition to that multi-asset class core diversified model portfolio, we then step into more tactical models through our business cycle.

We follow where we are within the business cycle and we'll change our inputs to sectors into where we map whether we are in mid or late coming out of the business cycle. And then addition to that, we have more completion portfolios. Bond portfolios, income portfolios, factory ETF portfolios, and even most recently, a sustainable bond model suite. A fairly large spectrum of model portfolios. Again, a high level kind of theme across most of them is that we too do tend to provide value in the active, passive blend of our model portfolios and a vast majority of them blend mutual funds and ETFs. And it is a pretty broad offering.

Jenna Dagenhart: Brian, over to you. How are your models differentiated from the marketplace?

Brian Kmetz: When I think about that, two things really stick out. One is our multi affiliate model. Netixis is primarily an active management asset manager, and we have a number of independent or essentially independent affiliates that Netixis holds onto, I guess you could say. One is Loomis Sales, one is Harris Funds, which have Oakmark as one of their flagships, Liquid Alts managers as well. And so what that provides is a pretty diversified lineup of funds that you can pick from when constructing portfolios. And what's also nice for the end advisor is that when they look at their bank statement or their statement, they see different funds. They see Loomis, they see Harris. To them, it looks fairly differentiated and they also have different investment processes, very different investment philosophies and that provides nice diversification as well for the portfolio manager. Second, I just think is our hybrid approach.

And so Suzie mentioned fidelity has hybrid models, that's primarily what we do, meaning that it's a blend of active and passive. And two thirds of the portfolio be active. That tends to be more strategic, stay stable over time, that's your longer time horizon. And these active managers are generally more fundamentally driven. The other third of the portfolio will be passive ETFs and that drives our tactical part of the portfolio. And what's nice there is you get some more tax efficiency with the passive. You really get broad exposure that you know exactly what you're getting, there's good transparency and it helps manage costs as well. And so from a tactical perspective, it's much easier to trade ETFs and really hone in on the exposure that you want. Those are really the two big things that stick out to me.

Jenna Dagenhart: And Seth, what's Columbia Threadneedle's approach to model portfolios and could you share a little bit about Columbia Threadneedle's history in this space?

Seth Buks: Yeah, of course. We started managing our first models in 2006. Our oldest portfolios have now over a 15 year track record. We manage about 30 different models across over $10 billion in model assets and that makes us a top 10 provider of multi-asset models in the industry. Our models are managed by our global asset allocation team, it's the team that I'm on. We're a 30 person team that manages over $120 billion in asset allocation portfolios for clients really around the world. We categorize our models in three ways, asset allocation or multi-asset, and that includes some outcome oriented portfolios like downside protection or inflation hedging. We have equity only portfolios, which I would categorize as single sleeve or completion portfolios and then income, which is both fixed income completion portfolios and then other outcome oriented solutions like diversified or multi-asset income portfolios. From an implementation perspective, what we hear is that advisors really want a model that is built in a way that resembles their thinking to be an extension of their portfolio construction process.

To that point, all of our strategies are a mix of vehicle types, mutual funds, ETFs, some include SMAs, none are just single vehicle. Like the other panelists have said, they're all a mix of active and passive. Alpha seeking active managers and then passive beta exposure for most of our tactical tilts. We take an open architecture approach. We source from the industry's best in class managers, actually some of the providers are on this call right now. None of our models have more than 50% of our own home cooking, and we don't charge any overlay or management feeds. We also importantly have live track records for composite accounts for all of our models. They aren't just theoretical or paper portfolios. And looking forward, I would say that like most of the industry, and I'm sure like most of the panelists here, I would assume they would all agree. This is one of the highest conviction areas for us. We know that to be a top asset manager in the future landscape of our industry. You need to have a successful and compelling offering in the model space and we hope that we do that and we hope to see this space continue to evolve over the coming years.

Jenna Dagenhart: Yeah. I'm sure we'll have a lot to talk about in the years to come on this panel. Now, Josh, turning to you, why is Franklin Templeton built to be a leader in the model portfolio construction?

Joshua Greco: Yeah. And we believe Franklin Templeton can be a leader in the model portfolio, construction space, just really going back to, well, our pedigree and legacy in constructing multi-asset solutions for clients. Going back to our flagship strategy, the Franklin Income Fund with inception 1948, really crystallizes our ability to put stocks and bonds together to create an outcome for clients. We've been doing so successfully for over 70 years. Certainly we think our pedigree and legacy gives us a leg up there, but Seth said something that I do want to touch on and he alluded to this and it's really our responsibility to deliver the best practices that we see advisors trying to replicate on their own. By that, I mean, combining the active and passive strategies together, combining mutual funds and ETF vehicles together and creating the capability to allocate across fund families. That open architecture element is something we see advisors spending a lot of time trying to create when you're getting model providers like Franklin, that can do it for you.

Franklin is built using a specialized investment manager approach. And so just looking at the fund families or investment platforms that we can access under that Franklin umbrella, you could easily have a model portfolio with close to a dozen independent brands delivered to you just using Franklin's in-house options. I mentioned our manager research capability earlier, but putting that on top of our own platform, you now create an opportunity to allocate across the industry for best in class managers in certain asset classes, really creating a huge time savings for the advisor who doesn't have to find funds in certain asset classes, perform their own due diligence to understand the manager's exposures or track record for markets they perform best in. And now we've created a program where we think Franklin Templeton brings those best practices to advisors, brings that consistency, that convenience and the scalability I talked about in the intro to advisors. And you're going to see a lot more of this from the major players on the street. I mean, just on this call alone, you have the fully scaled global asset managers that are delivering models just on this panel. We certainly anticipate that to continue being a theme here for the foreseeable future, as we're saving time and creating better outcomes for advisor clients.

Jenna Dagenhart: And we'll speak more about that in just a moment, but first I want to circle back to something that was mentioned earlier about tactical allocations. Brian, how can you balance strategic and tactical goals within your models?

Brian Kmetz: Yeah. I think the two can compliment one another, being that strategic, you're generally focused on a full market cycle, a longer time horizon for your end investor. And because of that, the view tends to be more fundamental. For instance, that two thirds of the portfolio that we have that's primarily active managers, both our affiliates and outside external managers, they take a very fundamental view on the markets. And so not only are we pulling the strings in terms of where we want to strategically be allocated in the long term, those asset managers underline the models are taken a longer term fundamental view, buying things that are in a big discount relative to their intrinsic value. Tactically, we tend to focus on a six to 12 month time horizon, and there it tends to be more technically sentiment driven with a nod to fundamentals, but that is not the primary driver of our decision making. You get these two time horizons that compliment one another in terms of what is driving the decision making and just in terms of the risk premium that you're trying to harvest at the end of the day.

Jenna Dagenhart: Clearly there seems to be a lot of advisor demand for models. I want to spend a little bit more time here on advisor adoption. Seth, where do you see the most acceleration of adoption in model portfolios and from a messaging perspective, what's resonating the most with advisors to help drive the use of models, either with themselves or with their clients?

Seth Buks: Yeah. Well, Jenna, adoption is really accelerating everywhere, wirehouses, independent firms, banks, et cetera, but I would say the fastest acceleration, regardless of the firm type, is advisors who are in their growth phase that are actively trying to drive new business and client acquisition. They tend to see models as a key part of that process. We've found that typically advisors with seven to 10 years of experience, many of them oftentimes are on a team. And they're usually not interested in acting as a portfolio manager. That's where we're seeing the fastest adoption. All of the largest broker dealer firms have done studies to really confirm that model users see enormous benefits from a business building perspective. They add more new clients than non-model users, and typically larger clients. Another big growth area is in the high net worth space. The original thinking here was that models were good for FA's with smaller accounts, the old 80/20 rule, don't spend too much time on that bottom part of your book.

I would say that perception is changing very quickly. Many advisors now view models as an important portfolio construction tool for higher net worth clients, particularly as more firms include SMAs in their models, focusing on tax efficiency and lower fees, as Josh mentioned earlier. And along those same lines for higher net worth clients is this idea of single asset class solutions. Many advisors, particularly in the RIA channel, like choosing say equity model, a fixed income model, maybe even adding on an alternatives model where they can manage the weights among the three, and then the model provider manages all of the underlying strategies of course. And to your point about the messaging, I think that the idea I try to convey most to advisors is that models aren't meant to replace any of their value proposition. I think unfortunately for many, the idea of models has become synonymous outsourcing, essentially removing what many advisors see as still a very large part of their value proposition.

What we like to remind our clients is that models are effectively SMAs, right? But instead of thinking of it as a separately managed account, think of it as a separately managed portfolio models can be used as a part of the portfolio construction process no differently than any other packaged product. The advisor's value prop doesn't change because ultimately, they're still conducting the due diligence on the model, implementing it within the client's overall portfolio, just like they would a standalone fund or SMA. Really think of it as just another tool in the toolbox. And interestingly, from a client's perspective, there have been a number of studies done that have shown that clients actually have a very positive and welcome reaction to advisors recommending or implementing a model in their account. The messaging has tended to resonate, even with that end user.

Jenna Dagenhart: Josh, how are you seeing advisors implementing models?

Joshua Greco: That's the beauty in models. The use cases are almost infinite, but I'll give you two of the predominant scenarios I run into, and that these are delivered again, a separately managed accounts, typically with low minimums, as low as $25,000 in many instances. That makes it an excellent small account solution. Talking about that convenience and consistency, that's a nice way to get that part of your book, that lower balance tranche of your business really consistent and consolidated with a very specific and understood investment approach that helps you save time, helps you deliver a better outcome to those accounts you don't want to spend a lot of time on. That's number one thing that always comes up is creating that consistency with small accounts. And the other is large accounts. In many instances, these core portfolios are really built to risk profiles. Targeting that risk tolerance experience of the underlying client can be executed at the large account level, making this the core of their wealth plan, and certainly satellite it with different objectives of the client, whether it be an ESG element, whether it be an innovation element, but this certainly sits at the center.

This is the core risk return experience over time, it aligns with their risk profile and their wealth plan. And you can use that to satellite it with different thematics, different forward thinking or innovation allocations that help give the client the core wealth experience, plus something interesting to discuss at a cocktail party.

Jenna Dagenhart: Always a plus. Now, Suzie, what have you found are the top reasons that advisors outsource investment management? I know Seth has mentioned timing and Josh mentioned that too. I'm guessing that's a big one.

Suzanne Daly: Yeah, you're absolutely right. But I'm going to tag on to what both Josh and Seth were talking about is along the lines of segmentation of where they're seeing success are in implementation if I may first. I think one of the recent observations I've had is as we talked to intermediaries in this space, whether they're the broker dealer or the REA looking to provide holistic solutions for the advisor is model portfolios don't only need to apply to that smaller segment or that lower cost part of their book. And I think what we've seen is that you can look to any of the institutional asset managers to provide a consistent experience across the entire well spectrum. If you're looking for a small account solution, maybe we do have a largely passive or index or ATF provided portfolio that meets that investment minimum and that expense ratio you're looking for.

And as you go up market to maybe mass affluent, maybe there's an active, passive blend as multi-asset class that meets the investment minimum expense ratio that looks and feels right for your client. And then even all the way up to the upper end, the high net worth, where you have maybe unified managed accounts or separately managed accounts that allow you to plug in for those more ultra high net worth solutions and have direct ownership of the underlying equities. I think all of these solutions, all of the asset managers on the screen today are delighted to talk about and provide a consistent experience and level of institutional asset management solution instead of services for advisors. I think there's something for everyone out there, but to answer your question more specifically, Jenna, I think Seth mentioned that there's no shortage of surveys in the marketplace.

Fidelity does a tremendous amount of surveys and we sit on a tremendous amount of data. And one of the surveys we ran last year, April 2021 was specifically to answer this question. And so we asked wirehouses, REAs and other broker dealers and all the advisors that sit underneath to say, what is your sentiment and reason for outsourcing? What are your feelings towards outsourcing? And we use those words specifically to see if it would jar any type of emotional response. And by order, the options were outsourcing technology, outsourcing service and ops, outsourcing financial planning, outsourcing marketing and communications. And then the last option was outsourcing investment management or portfolio construction. Related to all the other functions, outsourcing investment management and portfolio construction ranked the highest. And within that ranking, we saw five top reasons why advisors felt comfortable outsourcing. And categorically, they start with the leading one, qualified expertise.

Especially in a sector or a market or beyond traditional asset classes, that's where advisors felt most comfortable outsourcing to a third party or an institutional asset manager. That was number one. Number two was both Seth and Josh hit on this, better allocation of time. Number three was consistent performance, four was increased productivity, kind of dog ears back into time. And then five was the ability to amplify service to the investment management capabilities. I think the ability for the asset manager to provide timely trade rationale, marketing support, and overall why of the model portfolio is critical in this space, but I think it was interesting that we just asked that of our respondents last year. I thought I'd share that information.

Seth Buks: Jenna, if I can jump in and just build off something Suzie mentioned, I think it's a very important point and I believe Brian touched on this as well earlier. And this gets back to the reason that advisors are now looking to outsource maybe more now than ever. And I would say it all comes back to the speed at which markets are moving lately. I would argue that being tactical, at least over the past few years, is now really harder than ever. We just think about how quickly markets have bounced back after the large drop in March 2020, or even the difference between June and July of this year. You might think about how quickly the value versus growth trait reversed over the past few months or even small versus large. I'm not saying that all model providers obviously get these tactical shifts right all the time, but at least from an advisor's point of view, they know that there is somebody or probably even a team of investment professionals watching these things, trying to generate alpha.

We go back to a survey Suzie mentioned, I know her and I both love these surveys. In a post COVID world, some of these surveys have shown that 53% of advisors plan to increase their use of models and only 4% plan to decrease. A huge gap there. And I say a lot of it does come back to this idea of market volatility that really lit a spark for a lot of advisors who realize that when they see the types of market moves that we've had, instead of doing the trading that they would've wanted to do, many were stuck fielding client calls, acting as that behavioral coach that I touched on before. And they weren't able to be as proactive as they might have liked during some of these, what could be just phenomenal buying opportunities that we've seen.

Jenna Dagenhart: Yeah. Those are all great points. And Brian, what would you say are some of the best practices that FA's should keep in mind when they're allocating and implementing models?

Brian Kmetz: Yeah. I think there are a couple of best practices. The first one is not as intuitive as you'd think. A lot of times advisors allocate to models to kind of streamline their business. However, you can get over proliferation, much like an advisor can get too many mutual funds on their book and just have a nightmare managing that or too many funds, the same can be said for models. I think there's a happy medium between having too many models on your book and kind of running into that same problem in too few. You want enough where each client can kind of fit neatly into one of them, but at the same time, you don't want it to become a management nightmare where you have all these models now across your client base. That's a big one just from kind of business perspective. From a portfolio management perspective, I think you always want to do your due diligence if you're an advisor.

You want to make sure that the model provider has a very well articulated management process, and you want to make sure there's a feedback loop between the asset allocation, the manager selection, that final implemented portfolio, and then the attribution and risk monitoring to constantly monitor the portfolio and make sure that all the pieces are acting as they should and are contributing positively to returning risk. Those are big ones as well. And you want to make sure that the portfolio management team can tell you exactly how they are monitoring and running attribution on the portfolios because to us, that's a big part is that final step where you're constantly tweaking and making sure that everything is running as best as it can possibly be.

Joshua Greco: Yeah. If I can throw on some best practices that I've encountered in the field talking to advisors, it's really just picking a partner you're comfortable with. I can't emphasize that enough. I think Brian was right to caution against the proliferation. And so you really want to pick and partner with somebody who you are comfortable as a strategic partner of your business. In many instances when you're allocating to a model, it's different than picking an underlying asset class manager. Typically when you're buying an underlying asset class manager, they're just one part of your client's investment experience. When you buy a model portfolio for that client, oftentimes they may be the entire wealth management experience for that client. That comes with a lot of emphasis and a lot of support required on behalf of the asset manager when they partner with the FA. Definitely pick somebody you're comfortable with, pick somebody who matches your style.

If you've been talking to your client for years around the importance of strategic allocation and staying the course, switching and picking a tactical manager might be a bit of a disruption for them at the wealth plan level, because remember, these are delivered as separately managed accounts. They see all of the underlying trades. That can be a bit disruptive. Make sure you pick somebody who aligns with your thesis on allocation changes in the market. If you were tactical, maybe you stay tactical. If you're more strategic, maybe you stay more strategic. Or if you were somewhere in between like Franklin Templeton, pick something dynamic, which is roughly our time horizon for trading models. And lastly is the transparency, can't emphasize this enough. They see those allocation changes as I talked about, you want to be there, support your advisors with what happened in the portfolio, your market view, your trade rational. And of course changes at the detailed position level. Best practices, I've talked through with advisors from coast to coast, just three things I wanted to really highlight here before we got off the topic of best practices.

Jenna Dagenhart: Well thank you, Josh. And anything you would add in terms of what advisors should be looking for in a models provider?

Joshua Greco: I mean, it's really just that ability to partner. The onus for client service increases when you're delivering a multi-asset solution to the advisor. That's absolutely an area of focus and something you want to make sure your firm's delivering on if you're going to compete in this model portfolio marketplace.

Jenna Dagenhart: Obviously a lot of demand, a lot of adoption, but on the flip side of things, Seth, where do you see the most hesitancy and why?

Seth Buks: Yeah. I think there's really three main objections that tend to percolate up from advisors who haven't adopted models yet. And we've already touched on the first and that's this idea that advisors think of investment management as a core part of their own value add, and sometimes they're hesitant to offload it. They want to maintain that control of those investment management decisions because they believe that their investment expertise is why their clients chose to work with them in the first place. And in many cases, that's obviously true, but I do come back to what I mentioned before about how choosing a model should be seen as no different than choosing a fund or an SMA. It's just another tool and can be a very useful way to compliment everything else, the advisors already doing, it shouldn't be seen as a replacement for anything because in the client's mind, it's all part of that same advisor value add.

Now the second is around something that was already touched on before as well and that's the tax impact to transition to models in taxable accounts. We know this has been a barrier for adoption, really since returns across all asset classes have just been so strong over the past decade plus and accounts are sitting on huge gains. Now this might be a little bit less of a case this year, but any long term portfolio would still have a decent amount of gains. This is a challenge for any type of transition, even fund to fund. But for model, I suppose there is an embedded advantage, and that is that it has the ability to move like holdings over from any other part of a client's portfolio. If they have individual stocks, you can look for a model that has SMAs. If they're ETF holdings, you can try to find one that might have a decent amount of overlap. Most every asset manager, as well as all the wealth platforms out there, have tools to help make these transitions as tax efficient as possible.

And third and the final one is what I would call maybe a misconception or a misperception of poor performance. When I think about how the markets have done just over the past dozen years, models tend to be diversified, generally speaking, across geographies, across market caps, some tend to invest in alternatives, not just commodities, but true alternatives like hedge funds or liquid alternatives. If you compare that to a 60/40 S&P ag type portfolio or benchmark, it's just really hard for models to outperform. It's been a great decade to be in that kind of a plain vanilla cap weighted US stock or high quality fixed income portfolio given the decline in interest rates over the past dozen years. I would also argue that we've been in more of a passive asset allocation type of a market, right? If you bought nothing but those two index funds or ETFs, S&P and ag, and had a long term buy and hold approach, you did fantastically well over the last decade. All of this fancy stuff that we might try to add in from a model's perspective really hasn't helped unfortunately, but I would argue we are no longer in that environment. We believe that being diversified now, more than ever, across asset classes, across geographies and being more tactical will be rewarded as markets are changing now more rapidly than ever.

Jenna Dagenhart: Brian, what would you say are some of the hurdles related to the adoption of models? And then Suzie, I'll let you jump in after Brian as well because I know you have thoughts on this.

Brian Kmetz: All right. I think these have been mentioned, but I can flesh them out a little bit from my perspective. For one, I think a big hurdle is advisors view a big part of their value add proposition in building portfolios for their clients, whether their models are individually tailored. And so that's slowly getting chipped away with the messaging and the marketing that we've seen from the model industry, which I think is effective. And the second, I think, is the transparency and the need for the advisor to understand a whole new set of funds and a whole new investment process. And so, as Josh mentioned, the advisor should align themselves with a provider that fits their investment philosophy, maybe is already using existing funds that the advisor has in their lineup for their clients, but there still is a learning curve. I think the more the model provider can do to provide transparency, to provide material, outlining their investment process, their investment philosophy, trade rationale whenever a trade is made on a timely basis, that's huge because then it gets an advisor more comfortable with what's going on under the hood, and then they can relay that to end clients.

It really comes down to just transparency and client service and hammering that messaging that model portfolios are value add for the overall financial advisors business, even if they view portfolio construction as one of their value adds, it gives them more time to focus on their clients.

Suzanne Daly: Yeah, I mean, I don't have much to add in addition to all of the other thoughtful comments, other than to summarize in a bit of a different way saying that model portfolios were introduced to help advisors scale their practice. Ease of doing business should be essentially our mission. And so to the extent that we providers can make that easy for advisors, the decision, the implementation and transparency as everyone has mentioned, is going to be critical for all of us going forward. An example, implementation, I think Seth had on this. Maybe a use case, and we've heard some feedback in industry is I don't know how to make my first step into model portfolios. Can you help me? What is the first thing I do, how do I look and assess my book, do I do it sorting by qualified, non-qualified, do I do it based on AUM, on revenue?

What are the triggers of segmentation and how I take that first step and how do I make that first move? To the extent that we can be a user guide for advisors to help them through that process, I think that would be well received. And then in the comment of ease of doing business, similarly, it's around that transparency that Brian just hit on in flexible and timely marketing support is critical. And to the extent that we can share our story in a thoughtful, flexible, and timely way is going to empower the advisor to be able to tell our collective story together. But everything else, I just echo the comments of the other moderators.

Jenna Dagenhart: And Seth, when it comes to the attributes of model portfolios, what are the features or benefits that seem to resonate the most with advisors?

Seth Buks: I'm going to come back to my favorite surveys here, and we have done some surveys on this topic. And what we've found recently is that advisors first and foremost want models to be global, multi-asset, broadly diversified, give them access to asset classes that they might not invest in themselves or don't have a process around when it comes to getting in and out or overweighting or underweighting certain areas, things like commodities, emerging market debt, reeds, floating rate, et cetera. And this goes back to my last comment around the fact that advisors recognize the environment has changed, right? Sticky inflation, US equity dominance recently, widening credit spreads. All of these have led back to this idea of having more diversified portfolios. Second is to be more dynamic or to incorporate more tactical repositioning. I know a lot of the panelists have already talked about this. The advisors want something that is going to be proactive in seeking to capture more upside when risk is on, but also to protect when risk is off.

And they want to know that there's a process behind those decisions that they can articulate back to their clients. I know a lot of advisors will think back over the past few years when we've had some of these big market drops and in some cases, bigger rallies, they don't want a model that just sticks to its strategic weights when the market is either falling apart or rocketing off the bottom. Advisors now are actually going back to see how managers have navigated that volatility and how they might have repositioned their portfolios given that market evolve. And then the final is around strong risk management. Advisors want their models to be able to provide consistent returns and consistent outcomes for clients, similar to what I was just saying. Really helping them smooth out the volatility through volatile markets and importantly, helping to keep clients invested. What we hear often from our advisors is that they want something that is going to participate, but protect. Be willing to give up a little bit on the upside if it means that you can help protect really well on the downside.

Joshua Greco: Seth, you talked about articulation of process and I couldn't agree with you any more than I can right now. I think that is so critical to being competitive in the model portfolio space and for advisors out there. As global multi-asset managers, as everybody on this line is, when we quantify the resources that go into the model portfolios we deliver on your platforms that are available to use, the quantification of that resourcing really crystallizes for advisors, the time savings. For them to create a strategic allocation on their own, for them to stay on top of markets to dynamically tilt and size positions by risk for risk profiles, takes an enormous amount of time and then manager selection. I'll jokingly use this acronym when I'm talking to large audiences, there are two decisions you make in an asset allocation, the first one is how, the second one is who. They're the same three letters, but they're very different decisions. How much of each asset class to own, and then who to hire to run each asset class. These are very time consuming decisions. They're best left to a global asset manager with large research and resource platforms. And I think you really got to quantify that for advisors to see the immediate benefit of using models relative to building their own.

Jenna Dagenhart: Josh, what models are advisors reaching for, could you give us some examples?

Joshua Greco: Yeah. I mean quickly, you'll see total return models, which are what we call the Franklin risked based constructions, really sitting at the core of most model portfolio programs and sitting generally on the largest asset base so far. And these are things that are built according to a risk profile with seeking return at a given level of risk. These total return models are absolutely the dominant models in the conversation. You see income models coming up more and more lately. We're in a market where many forecasts leave price returns pretty unimpressive. You're seeing advisors rotate to secure income streams as that total return supplement on a go forward basis here. And lastly alternatives. We've seen a historically difficult market for bonds. Alternatives have been a rotation for risk and volatility mitigation without that bond duration. And so certainly we've seen alternative models become increasingly popular here in what's been a tough market for the traditional asset classes.

Jenna Dagenhart: And Suzie, if you had to summarize, what are some of the top industry trends as they relate to model portfolios?

Suzanne Daly: As many of my peers here today, I think a lot of us have what we refer to as Fidelity as a portfolio construction group, where we have CFAs hitting need to knee with advisors and trying to solve individual portfolio needs in helping to build smarter portfolios. We have a huge basis of data that we look at and say for us, it's 12,000 or so portfolio reviews a year to take a snapshot in time to say, what are advisors doing today to solve and build smarter portfolios on a one-on-one basis? Just to share a few kind of high level data points from those 12,000 reviews that we did last year, on average, advisors are holding 13 positions in a model portfolio. They're diversified across six asset managers and the total expense ratio of these model portfolios are 54 basis points. Not to say that every advisor looks like that, but that is the general thematic kind of data point to share.

I think that's important to help inform us what are advisors doing, what are the trends? Are they going towards more positions, more asset managers, higher fees or lower? We like to look at that as we think from a product strategy and development perspective, what are advisors doing today and where are they thinking they can better serve their clients. But on that basis, I'll pull out a few themes that we at Fidelity are thinking about, and they've been hit on earlier in this conversation. One, open architecture. Multi-manager open architecture. We're seeing that in two different ways. Two asset managers coming together to jointly build and co-facilitate and co-manufacturer model, maybe one manufacturer does asset allocation and one does underlying manager research a due diligence or flip it, but both go out and help evangelize and position and educate advisors on the joint offering. Or could be one asset manager is running the asset allocation and the manager selection, but it's got six, seven, eight, nine, 10 asset managers in the underlying model portfolio. Nonetheless to say, whether it's open architecture, multi-manager that is critical.

Additionally, I'd add that the core satellite UMA as a product wrapper is a continuous trend. We're seeing year over year, the growth rate of UMA's continuous to rise. And I think the reason why is there's a lot of different ways advisors can use UMA's. They can use them as a lockdown product, the asset allocation is locked and the underlying positions are locked and that feels a lot like a traditional model portfolio. Or they can use them as kind of an advisor directed product where they're pulling and choosing underlying tickers that fit into a guided asset allocation, or they can go and create their own unified managed account and do the asset allocation and underlying manager selection on their own. It provides a full spectrum of capabilities within the program type itself, depending on the configuration, but then allows for advisors to self identify their persona as well as an open architecture, one, 10, 99, one brokerage account, attribution at the manager level through performance.

One thing we haven't hit on too much today, which from Fidelity's perspective, we're certainly spending a lot of time thinking about is this notion of custom models or personalized models. And specifically, I would say in the REA space, we're seeing a lot of where those breakaway advisors look for a way to brand a model portfolio their own, but backed by an institutional asset manager and co-facilitating, co-write that model portfolio. It is a difficult business to scale, I'll be the first one to admit, but it's something that we see personalized or custom models are certainly a trend that is ubiquitous in the conversations we're having day in, day out. And then I think Seth hit on this earlier. The emphasis on tax transition and tax management is critical. Whether you find that through a third party platform or it's a set of proprietary tools, they make models that much easier to implement given all the conversation we've talked about today.

I think that's a trend where technology and tools sitting on top of model portfolios is going to be critical for the continued growth of our space. Then a few of the things that I'd add on is the ability for model portfolios, and a lot of us here today are doing this today, but even more so, adding in and solving for the more sophisticated client and user demand. Alts, liquid alts, commodities, ESG, direct indexing products, all of these being able to be solved for cryptocurrencies as extended asset classes in our models. This is a trend that we're seeing. It's been more difficult to achieve consistent performance with your traditional 60/40 and I think performance, we're looking to these extended asset classes. And so to the extent that we can provide our expertise in our thinking and our best practices and our why, as to why we're allocating X percent to alternatives in this model portfolio is critical.

I think we're going to start to see more coverage from all of the asset managers in that space and we're just more sophisticated investment vehicles in the model portfolios. And then last I'll just kind of land with technology, just because near and dear to my heart, where I think that a lot of asset managers are coming up with really great ways to again, allow the advisor to diagnose, run hypotheticals and then help them choose the best fit portfolio for their client. And to the extent that we can use technology to walk the advisor through that process in a seamless way to achieve that ease of doing business, I think is going to really drive the model business going forward. We're spending a lot of time focusing on that within Fidelity.

Jenna Dagenhart: Looking at technology innovation and new developments, Brian, what are some innovations in model portfolios and how are you staying ahead of the curve?

Brian Kmetz: Yeah, I think Suzie touched on this. There is a growing advisor base that wants more sophisticated portfolios and just her typical equity and fixed income. Liquid alts is really the first natural bolt on that you can have, and it's done exceptionally well, or areas of liquid alts, I should say, have done exceptionally well this year. Managed futures for instance, up close to 35% at one point year to date. It's given back some performance, but where you could find no diversification within stocks or bonds year to date, liquid alts provided a nice buffer. That's definitely caught advisor's attention. And then one step out from liquid alts is illiquid alts, and that's much harder to implement, but there are sophisticated platforms out there that can provide illiquid alts, such as private equity, private real estate, infrastructure that you can then bolt onto a portfolio of equities in fixed income. And for higher net worth clients, that's very attractive. From my perspective, I tend to think of things from more of a portfolio management perspective. It's just the sophistication of these model portfolios are really increasing and that's due to client demand.

Jenna Dagenhart: Finally, Suzie, anything you'd like to leave our viewers with in terms of what lies ahead for more broader adoption of model portfolios?

Suzanne Daly: I don't think anything addition to what we've talked about today. I think we're really heads down focused on providing the best and brightest service we can for advisors to understand the models and the value add behind our story to help them bring the best and bright us of their story. Focusing on technology, open architecture, sophistication, personalization, and really giving them, the advisor, the opportunity to have much information about the asset manager they're partnering with as possible.

Jenna Dagenhart: Well, I wish we had time for more, but we better leave it there, everyone. Thank you so much for joining us.

Brian Kmetz: Thank you.

Joshua Greco: Thank you. Great to be here.

Suzanne Daly: Thank you very much.

Seth Buks: Thanks so much, Jenna, and thank you to the panelists.

Jenna Dagenhart: And thank you to everyone watching this Asset TV Model Portfolios Masterclass. Once again, I was joined by Suzie Daly, product area lead, wealth advisor solutions and model portfolios at Fidelity Investments. Josh Greco, vice president, head of institutional portfolio management at Franklin Templeton Investment Solutions. Seth Buks, client portfolio manager at Columbia Threadneedle Investments, and Brian Kmetz, vice president and portfolio manager at Netixis Investment Managers. And I'm Jenna Dagenhart with Asset TV.

Show More