DOL fiduciary rule helped birth new model portfolio breeds

More advisers depending on these products for client portfolios

Apr 13, 2018 @ 4:03 pm

By Ryan W. Neal

Advisers have deployed investment models in client portfolios for decades, but the types of models available and how advisers are using them are rapidly changing, a new report said.

A number of factors are contributing to the rise of these products, including advances in technology, competitive pricing pressures, the rise of passive investing and demands for advisers to operate as fiduciaries, according to the Aite Group report.

The result has been a growing number of advisers relying on them for client portfolios, the report said.

Joseph Miskel, the executive vice president of MMxCHANGE, a model exchange launched by InvestEdge in 2017, said the trend is driven by advisers realizing that they need to focus more on their clients to drive business.

"In order to manage their time better, advisers can leverage other experts' investment models to deliver value to their clients, while they manage their clients' complete financial needs," Mr. Miskel said. "Investment models will continue to become more widely used due to their low cost structure and the flexibility to modify in accordance with a particular client account's investment policy, specific restrictions and goals."

The asset managers who supply the models often keep information about adoption and assets close to the vest, but Aite Group's research found that the number of advisers using products that rely on investment models, such as separately managed accounts and unified managed accounts, has grown rapidly.

"Today, investment models are in all types of wealth management accounts and will likely become more versatile and more complex with additional asset class and investment strategies," said Denise Valentine, a senior analyst at Aite Group who authored the report.

(More:TD Ameritrade finds momentum in its new model portfolio marketplace)

The push towards a fiduciary rule also is driving advisers toward model investments as a way to prove consistent investment processes and governance, she said.

"The use of models supports the creation of a trail of evidence regarding client account activity, including investment model/manager selection, product deployment, and ongoing account modifications," Ms. Valentine said.

Also fueling the growth of these products are new marketplaces to connect advisers with asset managers offering investment models. Once dominated by TAMPs and custodians, now technology vendors like InvestEdge, Orion Advisor Services, Riskalyze and Oranj all released marketplaces last year.

The proliferation of marketplaces is leading to experimentation with approaches and pricing. For example, Riskalyze CEO Aaron Klein said his company believes models should be more like templates than rules.

"Our strategy is to make sure advisers can easily shift between operating for scale with models, and operating as a surgeon on some of their accounts," he said.

However, the popularity of models could spur further disruption and consolidation.

"We're heading towards the building of models themselves being a very tough way for asset managers to make money, when you have big ETF and mutual fund players building great models and giving them away," Mr. Klein said.

(More: Capitect using technology to deliver 'mass personalization' to portfolios)

Ms. Valentine acknowledged the potential for consolidation, but said there is still a need for creative investment ideas.

"There is always room for nice strategies: some revisited, such as factor-based investing, environmental, social, and governance (ESG) investing, and the long-standing alternative funds, as well as new approaches, perhaps deploying artificial intelligence engines," she wrote in the report. "Whether investment decisions are quantitatively driven or are based on a money manager's personal skill, they still require people."

While market demand will determine the path forward, the best solutions let advisers easily access the products they need for each client, Ms. Valentine said.

What's really at threat is firms trying to force advisers into a particular product stream.

"Connectivity is everything. Closed systems are becoming relics," she said.

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