2020, a year of pandemic and uncertainty, has thrown many people’s expectations about the economy and investments up in the air, but it’s unclear exactly how it will affect the model portfolio boom, and how advisors’ use and adoption of these portfolios will have evolved when the dust settles.

Today, most advisors have embraced the model portfolios concept in some form within their practices, says Caleb Eplett, vice president of product management at YCharts, a provider of investment analytics.

“It really looks like most advisors are using some form of model portfolios,” he says. “Whether built in-house or using third-party portfolios, we think the adoption of that in general has been very high.” Most advisors are already using models in some form, even if they don’t realize it.

That’s because the model portfolio landscape has grown and diversified over the years to the point where models can mean different things to different people.

According to a spring 2020 Broadridge Financial Solutions report, model portfolios now encompass more than $3 trillion in assets—with most of this money in tax-advantaged retirement accounts like 401(k)s and IRAs.

In “U.S. Asset Allocation Model Portfolios 2020,” released in June, Cerulli Associates argued that the model portfolios universe could grow by an additional $2.1 trillion, which is nearly 9% of advisor assets, by the end of 2020.

Cerulli also estimated that if every advisor who should use models “based on their own practices’ capabilities” did use models, the model portfolio market could increase to $7.6 trillion by year-end 2020.

A larger 2019 study from Cerulli found that 12% of advisors were using exclusively outsourced model portfolios. According to YCharts, a little over one-third of advisors are currently using third-party models—which means third-party models are an “underutilized solution.”

“There’s three reasons advisors use models, the foremost being scale and simplicity of their practice,” says Greg Weiss, head of BlackRock’s managed account business. “Advisors spend 35% of their time formulating and explaining investment recommendations. Running money is incredibly hard to do and time consuming. If you can free up that 35%, it comes to 300 to 400 hours per person per year.”

Advisors also like that models provide them with another level of risk management, says Weiss, in that they offer a defined, repeatable investment process that advisors can demonstrate to the end client as well as regulators. The final reason advisors gravitate toward models is to manage clients’ fees with low-cost ETFs or mutual funds accompanied by low-cost, or sometimes even free, asset allocation recommendations and research.

Advisors fall into three main groups when it comes to the adoption of models.

Some take them off-the-shelf, seeking a turnkey investment solution to turn almost all discretion over to an asset manager or investment company. They may even automate most or all of the trading within portfolios.

Then there are advisors who build from scratch. These are investment managers who create and run their own models, allowing themselves to offer clients more bespoke solutions.

And finally there are what Weiss calls “followers”—people who customize third-party models with funds and trades of their own choosing.

In recent research, YCharts found evidence that which camp an advisor falls into depends most on their value proposition. Advisors who lead with their investment prowess are more likely to gravitate toward build-from-scratch models, while advisors more focused on holistic planning and comprehensive wealth management are more likely to lean toward turnkey solutions. The majority of advisors today fall somewhere in between, in the follower or customizer camp.

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