Interesting Marriages Among Model Portfolios

Clients may not know this, but advisors surely do: Being a registered investment advisor (RIA) means the advisor is small business owner and is wearing many hats and juggling multiple tasks beyond portfolios management.

To that end, 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. Data confirm model portfolios are resonating with RIAs.

“As of June 30, 2021, at least $315 billion was invested in third-party model portfolios, based on a survey of 28 of the leading model providers and data reported to Morningstar Direct,” according to the research firm.

One reason model portfolios are taking off with advisors is that many are now based on exchange traded funds, meaning a decent level of cost efficiencies are passed on to clients.

“Even after adjusting for model portfolios’ generally heavy use of passive options, they remain cheap versus mutual fund peers. Whereas expenses for model portfolios fall within a relatively narrow band, mutual funds have a handful of high-priced outliers; seven charge more than 200 basis points,” adds Morningstar.

For the advisor just getting started with model portfolios, it's worth noting there are some interesting brand combinations in this space.

Model Portfolio 'Frenemies'

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 I think what this does is really bring to fore--you know, it's great when you can find two firms that have complementary strengths that can come together and create a really more interesting portfolio,” says Morningstar analyst Jason Kephart. “It's rare that any one firm is going to be the best-in-class at every asset class you're going to want to have in a portfolio. So, in a lot of ways, it makes sense for these firms to collaborate and offer the strongest portfolio possible.”

A prime example of an interesting model portfolio marriage is WisdomTree partnering with PIMCO on model portfolio suite that pairs some of the former's equity-based ETFs with some of the latter's bond ETFs.

“WisdomTree has done a lot of research on factors and different active indexing strategies. And so, they're using their proprietary equity ETFs. But on the fixed-income side, they're leaning on Pimco to manage the fixed-income portfolio,” adds Kephart. “So, you're getting Pimco's expertise in actively managing bond strategies paired very thoughtfully with WisdomTree's research into different equity strategies.”

Expect More

Other interesting pairings in the model portfolio arena include passive king Vanguard with American Funds – long associated with active management – and BlackRock also teaming up with PIMCO on some model portfolios.

Those are just a few examples and one thing is clear: Advisors can expect more of these partnerships going forward.

“I think on the more practical side from a servicing advisor's standpoint, when you have Vanguard and American Funds' sales teams there to be able to service an advisor, that just makes it easier to get the information to the advisor and help them understand what's going on and why and deliver that message back to their clients,” concludes Kephart.