Model portfolios tumbled 16% in the first quarter, falling from a record high $3.5 trillion in assets under management in 2019 to $3 trillion, according to research by Broadridge Financial Solutions.
The report by the fintech giant said the decline was due to the selloff related to Covid-19. It said most of the assets (53%) were in advisor-led model portfolios, followed by home-office model portfolios at 30% and third-party model portfolios at 17%.
Broadridge said the market environment has disrupted model portfolios' asset mix, with equities tanking and bonds spiking in the first quarter of 2020. It said bond funds grew the fastest since 2018 at an 18% annual growth rate, gaining a 5% share in model portfolios at the expense of equity funds in the first quarter as the pandemic wiped out nearly $180 billion of equity assets. Bond funds were followed by mixed assets, which gained 4%, while equity funds stalled.
The research showed that exchange-traded funds continue to drive the popularity of model portfolios, Broadridge said. ETFs, it noted, rose to 43% of assets from 36% in the first quarter of 2018. By comparison, ETFs made up 30% of the retail intermediary marketplace.
Additionally, Broadridge said mutual fund-only model portfolios accounted for 42% of all model portfolios in the first quarter of 2020, while ETF-only model portfolios represented one-third (36%) of all model portfolio types. Hybrid strategies blending mutual funds and ETFs accounted for 25% of all model portfolio strategies. Also, active mutual fund share held steady at 53%, despite having steadily eroded over the past two years, the company said.
Andrew Guillette, senior director of Americas distribution insights at Broadridge, said that as asset managers build model portfolios, the low-cost and tax-efficient nature of ETFs continues to be particularly appealing. “As a result of the market environment caused by Covid-19 in the latter half of Q1 2020, we expect strategists at centralized research groups, as well as advisors running their own model portfolios, to rebalance their asset mix in the months ahead,” he said in a statement.
Broadridge noted that model portfolios have won over younger advisors, underscoring a broader industry shift to holistic financial planning. A recent survey by the company found that financial advisors under the age of 40 have nearly 60% of their fee-based advisory assets in model portfolios. In two years from now, those same respondents expect their fee-based advisory assets to be 66% in model portfolios, the company said.
Furthermore, 26% of respondents under 40 expect to have 100% of their fee-based advisory assets in model portfolios within two years, allowing for an increased focus on client service. Similarly, 53% of advisors believe that in three years they will be able to devote more time to growing and scaling a practice, whereas only 40% felt that way today.
Broadridge conducted the research using its proprietary algorithm tracking model portfolio activity across $14 trillion of directly sourced mutual fund and ETF assets, according to the report. The survey was conducted in February and March and included 300 advisors across wire, regional, independent broker-dealer and RIA channels.