Data confirms registered investment advisors (RIAs) continue embracing model portfolios, many of which are built on foundations of exchange traded funds.
At the end of the first quarter, advisors were directing approximately $350 billion in client assets to model portfolios – an impressive 22% increase over the trailing nine-month period.
Many advisors are already deploying model portfolios, whether it be of the mutual fund or exchange traded fund variety, in their practices. Model portfolios are a boon for advisors looking to streamline operations and spend more time building practices while focusing on other offerings, such as estate and tax planning and more.
Said another way, model portfolios are time-savers for advisors. Obviously, advisors should be spending time on both investment management and interacting with current clients/adding new ones. However, if there's an alternative to free up time on one of those fronts – and it's managing portfolios – why not seize that opportunity know it could pay off in the form of more new clients and more client satisfaction?
Ratings Game
As is the case with individual stocks, ETFs and mutual funds, there are ratings on model portfolios and as is the case with analyst calls on those other assets, model portfolio grades can be instructive for advisors, but they shouldn’t be taken as gospel, either.
“The Morningstar Analyst Rating is a forward-looking, qualitative rating that Morningstar’s manager research analysts assign based on their assessment of a strategy’s investment merits,” according to the research firm. “The ratings range across Gold, Silver, Bronze, Neutral, and Negative. The highest ratings go to strategies that analysts conclude will outperform their Morningstar Category benchmarks over a full market cycle on a risk-adjusted basis net of fees. Neutral- and Negative-rated strategies are those that analysts expect to underperform.”
Indeed, there is an element of outsourcing with model portfolios, confirming advisors are apt to search for solutions tied to names they trust. Fortunately, that’s an easily accomplished objective in this space. Not surprisingly, some of the most venerable ETF sponsors are also dominant forces in the model portfolio realm.
That includes purveyors of some of the highest-rated model portfolios. Five of the model portfolios rated “gold” by Morningstar hail from BlackRock and Vanguard – the two largest ETF issuers.
“The Vanguard Core series and its sibling CRSP, S&P, and Russell series also offer topnotch, highly diversified underlying index-based funds. The latter three were upgraded to Gold from Silver in June 2022. These four-model series each offer the same broad exposure to global stocks and bonds at the portfolio level. Their simplicity and low costs should prove hard to beat over the long term,” adds Morningstar.
More to Come for Model Portfolios
Advisors that have been in the game awhile that among fund issuers – ETF or mutual – the various sponsors are known for different things. For example, Charles Schwab and Vanguard are frequently associated with low costs while Fidelity and T. Rowe Price are known for stock picking and active management and PIMCO is known for fixed income prowess.
Those are just a few examples, but the point is one fund issuer may excel in area where a rival does not and vice versa and that makes for some interesting combinations in the world of model portfolios.
And yes, there is some efficacy in ratings, which can make model portfolio decision-making easier for advisors.
“The Morningstar Analyst Rating has done a good job of sorting models based on our conviction that they could outperform their category benchmarks thus far. On average, Silver-rated models outperformed Bronze-rated models and Neutral-rated models had slightly negative alpha versus their category benchmarks,” concludes Morningstar.