For example, in January 2020 Fidelity launched a suite of four bond-only model portfolios designed only to be the fixed-income portion of a client’s or advisor’s portfolio. Previously, many model portfolios included a mix of both equities and bonds based on the 60/40 core. The new fixed-income model portfolios are designed to maximize risk-adjusted total return as well as accommodate a range of risk preferences, including duration and credit risk, the firm says.
But the idea of “increased personalization” goes beyond actual investments, Goulet says. It also involves enabling financial advisors to establish closer relationships with their clients through enhanced communications.
“The role that models play is more than providing the components for advisors,” he says. “We are taking it one step further, providing more prescriptions, more detail and content that the client can give to the end customer.
“Models tend to lead to a high volume of interaction with financial advisors and their clients,” he says. “They are really intended to keep people invested in the market through market cycles so they avoid market timing and being in and out of the market in a way that might disadvantage their goals over the long term. A big part of that isn’t just the investment choices you make, but the level of engagement and the level of communication.”
With that in mind, Fidelity is also focused on “making it as easy as possible” to make its communications “visible and actionable” to independent financial advisors “in the desktop solution that they use most frequently.” Goulet says about 2,000 advisors subscribe to Fidelity’s commentaries, which include the firm’s take on the market as well as explanations of its recent portfolio changes.
Brooks Friederich, director of research strategy at Envestnet, says the model portfolio industry will see the market opportunity simply because financial advisors will need to outsource more of their investment management to model portfolios if they want to increase the number of clients they can handle and service them properly. Envestnet, which has been offering model portfolios for more than 10 years, offers a variety of model portfolios from companies such as BlackRock, Vanguard and Morningstar through its “Fund Strategist Network” on its wealth management platform.
“A lot of financial advisors understand that, in times like these, their real value is meeting with and spending time with their clients and focusing on their financial plans, goals and budgets, besides their investments,” Friederich says. “There comes a point in time where you have to outsource. You can’t do it all in-house. There comes a tipping point in how many clients you can handle. Advisors who use model portfolios free up more time to service their clients and show them their unique value-add.”
While most clients “will most likely be fine with standard passive model portfolios, financially more literate clients who put a stronger emphasis on wealth management will most likely expect portfolios to reflect more recent approaches to investing,” says Felix Bertram, founder of Bertram Solutions LLC in Kirkland, Wash. “Many of these approaches are based on the idea of first improving risk-adjusted returns, and then using leverage to scale risk and performance until the investor’s objective is met. Unfortunately, the available model portfolios currently do not reflect these needs, yet. However, in the light of bond returns diminishing in the foreseeable future, we anticipate that future software releases will include more sophisticated models to address these needs.”