Investors in Model Portfolios Are More Confident, Less Stressed Amid Ongoing Market Volatility, Finds Natixis Investment Managers Survey

BOSTON, October 26, 2023 – After recent bouts of volatility and inflation, just one in three Americans feels confident about the state of their finances right now. Yet those invested in model portfolios are nearly two times more likely to express confidence (45%) than non-model users (24%), according to new survey findings published today by Natixis Investment Managers (Natixis IM).

Model portfolios – the highly-vetted asset allocation strategies professional money managers use to build investment portfolios around specific risk and return or portfolio objectives – were once the domain of institutional investors. Their use has greatly expanded in recent years, and as of 2022, most financial advisors (93%) are now using model portfolios to manage some or all of their clients’ discretionary assets, as Natixis IM has previously reported.

A new report from the Natixis Center for Investor Insights takes a deeper look at the use, drivers, and evolution of model portfolios, building on previously released data from the Natixis IM 2022 survey of financial professionals with new, never-released data from Natixis IM’s 2023 surveys of individual investors in the US as well as findings from Natixis IM’s 2023 survey of the investment professionals responsible for selecting funds and other investment products on their firm’s advisory platforms, into which $17.5 trillion in client assets are invested.

Taken together, the findings show that model portfolios are proving to be a win-win-win for investors financial advisors and advisory firms, particularly in light of the changing investment landscape and increased regulatory focus on investor protections and product suitability.

Key findings include:

• 97% of clients invested in models say they trust their financial advisor, compared to 73% of clients not in models.
• 78% of investors in models see market volatility as an investment opportunity while just 47% of non-model clients do. They are half as likely to say they feel stressed out about their finances (11% of model users compared to 23% of non-model users.)
• 65% of fund selectors say market volatility is accelerating advisors’ use of model portfolios.
• 77% of fund selectors say model portfolios deliver a more consistent investment experience for clients across the firm, giving them greater choice (64%) and a lower-cost option (74%).

“The diversification and targeted risk/return attributes of model portfolios make a strong case across a broad investor base,” said Marina Gross, Head of Natixis Investment Managers Solutions. “Models greatly streamline the investment process and arm financial advisors with institutional quality portfolio management accompanied by deeper insights and rationale to talk with clients about allocation changes, risk and portfolio performance.”

Models allow advisors to advise on what matters most to clients
Natixis IM’s survey of individual investors found that about 50% of those who work with an advisor have assets invested in models. Another 22% aren’t sure if they are or aren’t in models. By comparison, just 12% of investors who are not working with an advisor say they are invested in models. Seven in ten (70%) say they are not, and 18% are unsure.

“Investors are telling us that the most important facets of their relationship with an advisor are activities that define a more holistic approach and more personalized service,” said Dave Goodsell, Head of the Natixis Center for Investor Insights. “Model portfolios free up time for advisors to introduce clients to a broader set of services and demonstrate the value of advice beyond allocation.”

In addition to a higher degree of confidence in their finances and trust in their advisors, model investors have characteristics that are distinctly and statistically different from non-model users. First and foremost, model clients think the most important facet of their advisor relationship is that they are getting financial planning advice (49%). Financial planning also is important to 43% of investors not in models, but that 6% difference speaks volumes when looking deeper at the services clients are interested in getting from their advisor.

The survey found that the professional services most wanted by model users versus non-model users are as follows:

• Retirement income planning (62% vs. 43%)
• Financial planning (59% vs. 28%)
• Sustainable investments (50% vs. 23%)
• Private investment opportunities (38% vs. 15%)
• Tax-efficient investment strategies (41% vs. 25%)
• Lending and credit solutions (19% vs. 9%)

Models are evolving: Customization without compromise
The model offering on advisory platforms is still dominated by advisor-built and proprietary, or in-house firm models; however, increasingly, models built by third-party asset managers and other strategists are being added to give advisors and their clients more choice. At least half (51%) of US wealth managers and other advisory firms plan to add to their third-party model offering in the next year, and 58% of fund selectors say their firm is finding a greater need to add specialty models that address specific client objectives.

Natixis IM’s 2023 survey of professional fund selectors found that:

• 66% of the model portfolios on US advisory platforms are built in-house; 25% are run by third-party asset managers; and another 9% are white-label offerings. In 2020, 80% were in-house, 15% were third-party, and 4% were white-label models.
• 69% agree that model portfolios add an extra layer of due diligence in the investment process. This is likely why 77% also agree that models help manage firm risk.
• 66% say that models enhance advisors’ ability to tailor portfolios to client-specific needs. In many cases this may be a more integrated approach to managing a wider range of client assets, as 82% are finding that models make the implementation of unified managed accounts more efficient.

“Model portfolios have evolved in such a way that it’s possible to add sleeves with specific attributes and to mix and match in-house and third-party models or core and specialty models,” added Marina Gross. “Financial advisors can customize portfolios to their liking depending on clients’ goals and risk tolerance, at scale and without compromising investment quality.”

One key area that 46% of fund selectors say their firms are looking to add are tax-efficient models for high-net-worth investors, a finding that Natixis IM reported earlier in the year. In general, these high-net-worth models incorporate the diversification benefits of traditional models with direct indexing, making it possible to implement tax-loss harvesting at scale – or the sale of “down positions” to offset capital gains in other positions – an active strategy that’s not possible with investments in passively-managed index funds.

Other models that firms are looking to add include a focus on income (44%), alternatives (43%), environmental, social and/or environment factors (34%), and thematics (26%) that capitalize on macro trends and other innovation areas.

Natixis Investment Managers’ full report, entitled Model Citizens: Model Portfolios align firms, advisors, and client goals, can be found by visiting https://www.im.natixis.com/us/research/2023-models-report.

Natixis IM’s report on model portfolios builds on findings from:

• Natixis IM 2023 Survey of Individual Investors
  https://www.im.natixis.com/us/research/2023-individual-investor-survey
• Natixis IM 2023 Survey Professional Fund Selectors
  https://www.im.natixis.com/us/research/2023-fund-selector-outlook
• 2022 Natixis IM Survey of Financial Professionals
  https://www.im.natixis.com/us/research/2022-financial-professionals-report