Advisers keen for model ETF portfolios

One-stop strategies are freeing up time for client service

Jun 17, 2012 @ 12:01 am

By Jason Kephart

The growing popularity of exchange-traded funds has led to a boom among money managers who specialize in using low-cost passive investments to build go-anywhere portfolios.

These model ETF portfolios typically use ETFs to invest globally across all asset classes, such as equities, fixed income and commodities, to shoot for a real return.

Financial advisers increasingly are outsourcing some of their client assets to these managers so that they can spend more time on clients and less time managing portfolios.

“As the ETF landscape has gotten more complicated, not all advisers feel comfortable building their own portfolios,” said Sue Thompson, head of iShares' RIA Group. “Advisers have to either be the expert or find one.”


Jennifer Failla, an adviser who works exclusively with high-net-worth divorcees, started allocating some of her client assets to a managed ETF portfolio last month as the demands of divorce planning continued to eat away from time she would otherwise spend managing portfolios.

“It's gotten to the point where I literally can't do both the investing and give my clients enough time,” she said.

“I love the investing part of it, but some days are so busy, I can't tell you what happened in the market.” Ms. Failla said. “ You can't be an expert in everything.”

Ms. Failla, principal at Planning Thru Divorce, turned to an ETF portfolio because she was looking for something that matched her investment values.

“I wanted someone philosophically aligned with me,” she said.

That meant a focus on low costs and transparency, two of the most popular features of ETFs.

Of course, even though ETFs are known for their low costs — expenses generally range from 0.05% to 0.6% — there is a management fee attached to the portfolios that usually runs about 1%, in addition to the underlying fees and transaction costs.

Gary Vawter, principal planner at Vawter Financial Ltd., uses model ETF portfolios for practical purposes.

“It's easier for investing new money and handling distributions,” he said.

The manager that Mr. Vawter uses handles the money coming in and out and makes the decisions on what to buy and sell.

Assets in model ETF portfolios tracked by Morningstar Inc. grew to $46 billion by the end of the first quarter, up 43% from a year earlier.

BlackRock Inc.'s iShares, the largest ETF provider, with $500 billion in assets, works closely with more than 100 model ETF portfolio providers, and projects assets to grow to $120 billion by 2015.

Money managers have turned to ETFs for their model strategies because of how easy it is to move in and out of asset classes and regions based on their macro views.

“With ETFs, a manager can go from owning the S&P 500 to China in two transactions,” said Andrew Gogerty, a model ETF portfolio strategist at Morningstar.

The ability to move in and out of asset classes quickly also allows the managers to get out of troubled asset classes and into cash quickly if the market turns sour.


“When you're building a global asset allocation portfolio, the best ammo, in our view, is ETFs,” said John Forlines, chief investment officer at JAForlines Global Investment Management, which has $5 billion in assets in model ETF portfolios.

Even with their growing popularity, model ETF portfolios are not for everyone.

For starters, the strategies are offered primarily through separately managed accounts, so the minimum investments start at $50,000, quite a bit more than the average mutual fund or ETF.

And like any actively managed portfolio, there's always the chance the manager could underperform.

Picking the right manager is especially hard when there isn't a track record on which to rely. Two-thirds of the 370 model portfolios Morningstar tracks were launched in the past three years.

“Advisers need to make sure they understand the strategy and that it fits the goals of their clients,” Mr. Gogerty said.


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