Model portfolios align firms, advisors, and client goals
As US wealth managers broaden their focus from providing investments to delivering comprehensive financial planning, model portfolios are helping to streamline the investment process for advisors and provide clients with more consistent investment experience.
Clients are responding in kind. Data from the 2023 Natixis Global Survey of Individual Investors indicates that clients invested in models are more confident investors who have a higher level of trust in their advisor and are more likely to think volatility can offer them opportunities to grow their assets.1 And just as firms anticipate, clients invested in models show greater interest in a wider array of services from their advisor.
The model portfolio business in the US has grown substantially in recent years as Morningstar reports assets had grown to $349 billion as of March 2022.2 Even more growth should be anticipated as 47% of fund selectors at US wealth managers report that it is their firm’s objective to move even more clients into model portfolios, while 51% say their firm plans to expand their offering in the next year.
Insights gained from surveys conducted by the Natixis Center for Investor Insight between May 2022 and May 2023 suggest that models deliver on more than the investment front. Overall, data indicates that models are helping to align firm, advisor, and client interests; freeing up the time advisors need to deliver a broader set of client services; and instrumental in providing clients with a more holistic relationship.
It looks like a win-win-win proposition in which firms, advisors, and clients are able to address key needs and objectives:
- Wealth managers facing increased regulatory focus on suitability see models as providing an extra layer of due diligence; 77% say models help them manage risk, all while providing more customized client experience.3
- Advisors who need to balance business growth expectations with growing demand for expanded services from clients are finding that models can afford them more time to address the challenge without compromising on investment quality.
- Clients who are presented with a more complex financial picture are getting access and institutional-quality investment management and a more holistic advisory relationship.
Once dominated by advisor-built and proprietary firm models, the product universe has expanded to include third-party models from asset managers and other strategists. In fact, models have become such an important part of the wealth management picture that Morningstar began publishing its own ratings for third-party models in March of 2022.
At the center of the expanded use of model portfolios are wealth management firms looking to enhance the efficiency of their advisors and streamline the investment process for clients.
Model firms: Implementing model portfolios for enhanced efficiency
An increasingly complex investment environment and rapidly changing economic landscape present key business challenges to wealth managers: On one end of the spectrum, they’re faced with the challenge of overseeing the investment decisions of thousands of advisors who are often managing investments for hundreds of clients. On the other, they’re faced with helping clients stay invested when markets are uncertain and volatile. Fund selector sentiment suggests that model portfolios can help to address both concerns.
From a business perspective, more than three-quarters of fund selectors (77%) say model portfolios help their firms manage risk. For many, models provide a more unified approach which makes it easier to rationalize investment decisions and explain performance. In fact, more than two-thirds of fund selectors (69%) find that model portfolios add an extra layer of due diligence in the investment process. In essence, portfolio managers are selecting and monitoring the investments, and the selectors themselves are monitoring risk/return parameters and overall performance of the models.
In addition to enhancing risk management, firms are also finding that models help them address key business and service objectives. Overall, 64% say models allow them to give greater choice to clients and 74% say models provide clients with a lower-cost option.
Selectors also see models as a key to delivering more personalized financial solutions for clients, as 66% say models enhance their 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.
According to 77% of fund selectors, the key benefit is that model portfolios give clients a more consistent investment experience. In fact, when surveyed in Q4 of 2022, 65% said volatility and uncertainty were accelerating the shift to model portfolios, suggesting that market losses of 2022 have convinced many advisors and clients of this key benefit.
Expanding the platform
Fund selectors report that their firms are currently deploying a mix of models. On average firm platforms are composed of just under two-thirds (66%) of their own proprietary models, while 25% are run by third-party managers with another 9% coming in white label offerings. Those numbers are likely to change as 51% say they plan to add to their third-party model offering. In part, these new models may be designed to complement efforts to deliver a more customized investment plan.
In fact, 58% of fund selectors say their firm is finding a greater need to add specialty models to their offering. One key area of focus will be adding tax-efficient models for high net worth investors. Overall, 46% report their firm will add these models. In general, these high net worth models incorporate the diversification benefits of traditional models with direct indexing to implement tax loss harvesting to help minimize capital gains taxes. The integrated portfolio makes it more efficient for advisors to implement a more personalized strategy across a large swath of their book of business.
Selectors will add other specialized models to their platforms as well. Overall, 44% say they will add income-oriented portfolios, while almost the same number (43%) plan to add alternative investment models. About one-third (34%) say they will add ESG models, a move which 57% say will make it easier to implement ESG across client portfolios. Another 26% plan to add thematic models to give clients a diversified strategy for approaching new opportunities such as the green economy, urbanization, and digitalization.
Where they are looking to add models
|High net worth / Tax-efficient models||46%|
Risk management comes first in manager evaluation
To be part of this expansion, third-party managers will have to measure up in some critical areas. Selectors say managers have the best opportunity to differentiate their offering with their ability to demonstrate active risk management (52%). Conversely, selectors are also looking for managers to continually add value through tactical asset allocation (40%) that allows models to adapt to changing market conditions.
In addition to the investment process, selectors will look for managers’ ability to customize models based on firm requirements (39%) and provide a competitive fee structure (38%). Tax management capabilities (28%) and a diverse manager offering within the model (28%) round out other considerations.
Expanded offerings couldn’t come at a better time for advisors as they look to meet robust growth business goals.
What is the Fund Selector Survey?
Model advisors: Dedicating time to growth activities
When surveyed in 2022, financial advisors in the US said they planned to grow their practice by an average of 14.2% annually through 2025. To achieve that lofty growth goal, advisors say they will need to add a median of ten new clients to their roster every year. That will be a hard mark to meet for time-strapped advisors who are already trying to manage investments, manage clients, and ultimately manage a business.
Advisors recognize there are limited opportunities for achieving business growth goals. Almost six in ten (59%) say it will be driven by winning new assets from new clients. A little more than half (52%) think enhancing their efficiency will help drive growth, and 38% think revised pricing will help. About three in ten (31%) expect they will win more assets from current clients, while just under one-quarter (24%) underscore the need to retain assets from current clients.
But advisors are not able to dedicate enough time to their number one growth activity: prospecting for new clients. Results from a survey conducted in 2020 show that on average advisors dedicate just 9% of their time each week to prospecting. In fact, they report that the largest blocks of their time are dedicated to managing clients (27%) and meeting with clients (25%). In fact, advisors say they spend only about 15% of their week running investments.
How advisors spend their days
Going beyond asset allocation takes time
So even as it stands now, advisors can dedicate only a small part of their time to investment management. That time may become even shorter as they look to meet growing client demands across a growing book of business.
In fact, 63% of advisors say their ability to demonstrate value beyond asset allocation is critical to their success. More specifically, 60% say it’s critical to establish a relationship with their clients’ families and 34% say client retention will be instrumental to their growth.
But these are not quick wins. More than two-thirds of advisors find it challenging to demonstrate their value beyond allocation. Eight in ten say it’s challenging to establish relationships with the next generation. Six in ten say client retention efforts can be challenging. The biggest challenge they face: time.
To hit their goals, advisors will need to find time to prospect. This is especially true when individuals say the most important facets of their relationship with an advisor are activities that define a more holistic approach and more personalized service: “Giving me financial planning advice” (45%) tops the list of what’s important followed by “understanding my unique situation” (42%), “being accessible” (39%), “listening to me” (39%), and “helping me understand investing” (35%).
The model solution
For many, model portfolios help alleviate that time burden by allowing them to streamline the investing process and introduce clients to a broader set of services. Overall, 93% of financial advisors in the US say they implement some sort of model in their practice. On average they use a combination of their own models (54%), firm (26%) and third-party (20%) models.
In terms of how they implement models, most say it’s done on a case-by-case basis (58%), but more often than not those cases involve transferring client assets to their practice. Overall, 42% say they use models for retirement account rollovers as it provides an easy and efficient way of allocating the holdings, while another 29% say they use models to transfer assets into their practice when they win new clients.
When the time comes to recommend a model, advisors focus on two key investment attributes: risk/return profile (77%) and diversification benefits (62%). They also stress the reputation of the investment team (52%) and the portfolios’ performance history (51%). Further down the list of priorities are the independence of the advisory firm (26%) and the strength of its brand (25%).
In their own evaluation, managers take a deeper dive on performance, looking first at the risk-adjusted returns (59%). They also look for active management from the model providers, considering first active risk management within the portfolio (46%) and then tactical allocation (37%). One-quarter also say they also look at tax management capabilities.
What is the FA Survey?
Model clients: More confident with greater expectations
Wealth management firms and advisors may find that model portfolios can give them greater efficiency. Clients in models are finding greater confidence in their finances, higher levels of trust in their financial advisor, and are more likely to want a deeper service relationship with their advisor.
About 50% of the 750 investors in the 2023 survey who work with an advisor say they are invested in models – another 22% say they’re not sure. Just 12% of investors who are not working with an advisor say they are invested in models, 70% say they are not, and 18% are unsure.
Model clients in the survey pool tended to skew to the lower end of the wealth spectrum, including 37% of mass market investors ($100,000–$300,000 investable assets) and 37% of mass affluent investors ($300,001–$500,000), which on the surface might suggest advisors have tended to deploy model portfolios as a feeder system into their practice. It’s important to note, however, that there is also a significant number (36%) of emerging high net worth investors ($500,001 – $1 million) who are also invested in models.
Regardless of how they are situated across an advisor’s book of business, model investors share one key difference from those who are not in models: They are close to two times as likely to say they are confident about the state of their finances (45%) as those who are not in models (24%). Conversely, they are half as likely to say they feel stressed about their finances (11%) as those not in models (23%).
This rift in their level of confidence comes across loud and clear in their views on two key factors that can often trigger investors: market volatility and inflation. Overall, 78% of those invested in models say they look at volatility as an investment opportunity while just 47% of non-model clients do. Similarly, 70% of model clients say they should invest more to keep pace with inflation while only 40% of non-model clients agree. Model clients also feel that inflation has underscored the need for professional advice (80% vs. 48%).
A matter of trust
One reason why they may feel this way is that clients invested in models were more likely to say they trust their financial advisor when making financial decisions (97%) than those who are not in models (73%). So how do advisors earn that trust?
First and foremost, model clients think the most important facet of their advisor relationship is that they are getting financial planning advice (49%). This is also important to the others in our survey (43%), but that 6% difference speaks volumes about the number of services they are interested in getting from their advisor, including retirement income planning (62% vs. 43%), financial planning (59% vs. 28%) and sustainable investments (50% vs. 23%). They are also more likely to want private investment opportunities (38% vs. 15%) and tax-efficient investment strategies (41% vs. 25%) as well as lending and credit solutions (19% vs. 9%).
What services are they most interested in?
|1. Retirement income||62%||53%|
|2. Financial planning||59%||42%|
|3. Sustainable investments||50%||35%|
|4. Tax-efficient investments||41%||32%|
|5. Private investments||38%||23%|
|6. Estate/Generational planning||37%||24%|
|7. Lending/Credit solutions||19%||12%|
What is the Individual Investor Survey?
Models: A win-win-win solution
Model investors are literally the model clients that make a modern practice thrive. Clients want more than an asset allocation strategy from their advisor. Firms are wise to orient their service offering to a wider set of client financial objectives than investments alone as they are much in demand, wiser still to provide the models option on their platform. The opportunity for advisors is to align themselves with these two market forces.
Advisors know they have to go beyond asset allocation to earn new assets from new clients or win more assets from their current clients. Right now, many are challenged by the time it takes to deliver. But model adoption shows that it may provide the time advisors need, without compromising on investment quality.
Any advisor struggling with the question of adding value would do well to see how much service demands from model clients differ from those who are not in models. From financial income planning to income planning to tax efficiency, these clients are defining where the value lies beyond allocation.
2 Morningstar, Inc., an independent investment insights firm.
3 Natixis Investment Managers, Global Survey of Fund Selectors conducted by CoreData Research in November and December 2022. Survey included 441 respondents in 28 countries throughout North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East.
The data shown represents the opinion of those surveyed, and may change based on market and other conditions. It should not be construed as investment advice.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of October 2023 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.
All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Natixis Distribution, LLC is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.