New sources for data on model portfolios could help increase adviser adoption

Two firms seek to make it easier for advisers to evaluate models

Jun 18, 2019 @ 5:00 pm

By Ryan W. Neal

As the number of model investment portfolios available to advisers continues growing alongside digital marketplaces for advisers to buy them, some see an opportunity to help advisers evaluate this expanding ecosystem.

One company making the move is YCharts, a cloud-based investment research and analysis platform that launched in 2009 as an alternative to the Bloomberg Terminal. Just as advisers use YCharts to find specific securities or funds to include in a client portfolio, the technology firm wants to be a go-to source for comparing and making decisions about model portfolios.

"What we're trying to provide is as much of the underlying data on the model, and what is in it, as much as possible," said Caleb Eplett, YCharts vice president of product management.

The challenge is building something advisers can use to make like comparisons. While data on individual stocks, mutual funds or ETFs are already normalized, it's not as easy to draw similar comparisons between two portfolios, even if they have similar allocation splits.

By bringing together underlying information about the model, advisers can see exposures to certain stock sectors, price-to-earnings ratio or any other relevant data points to make a more apples-to-apples comparison, Mr. Eplett said.

(More: What's keeping advisers from using investment model marketplaces?)

For many advisers, the only information they have to make decisions on a model portfolio comes from the asset managers, which tend to own the underlying products.

"Trying to understand the difference between all of the models is like staring at alphabet soup. So [advisers] go with a brand they trust," said Kyle Van Pelt, a strategist with SS&C Advent.

An independent information source could help separate fact from marketing spin, and maybe even help more advisers embrace model-based investing.

"Not only would it have to be a third-party for analysis, but I think removing branding from the models would be compelling too," Mr. Van Pelt said.

Ben Smith, founder of Cove Financial Planning, uses a mix of building his own portfolio models and using Betterment for Advisors to serve his client base of Generation X and Y professionals. As a former asset manager who managed and distributed model portfolios, he does his own research manually, sometimes having to reach out to service team of each asset manager to get information about a model's cost, efficiency and quality.

"I think advisers, myself included, would see a lot of value in a consolidated resource like that, just like we see value in Morningstar, for example, assessing mutual funds and other investments based on various criteria," Mr. Smith said.

YCharts launched its model portfolio product in October. Right now, advisers have to replicate the models manually, but YCharts envisions a day when more of the models can be automatically available for advisers.

Morningstar, which launched its own model marketplace in May, is also looking to make it easier for advisers to evaluate the quality of available models.

"We actually just started publishing our forward-looking Morningstar analysis ratings on models at the end of March," said Jason Kephart, Morningstar associate director of multi-asset and alternative strategies. The firm now rates six model portfolios and plans on increasing that number.

Using the Morningstar Direct software, advisers can roll up the underlying information to see it at the portfolio level, and the tool has a separate section just for analyzing models.

"Anything you can see on Morningstar Direct for a mutual fund, you can see for models," Mr. Kephart said.

While he agrees the data can make it easier to compare peer models, Mr. Kephart said the number of model portfolios on the market isn't as overwhelming as it appears. Many of them are variations on a theme, and selecting an appropriate model for a client is the same due diligence that advisers already bring to selecting individual funds.

But Mr. Eplett said this due diligence can be a competitive advantage in a new era of financial advice. Despite advantages in operational efficiencies, some advisers don't want to relinquish investment management because it is core to their value propositions, Mr. Eplett said.

(More: DOL fiduciary rule helped birth new model portfolio breeds)

If macro trends in the industry like fee compression, regulations and technology are pushing the industry towards models anyway, being armed with data to make a more informed decision about which model is best for a particular client can be an adviser's differentiator.

"I see a lot of parallels in what we are looking at right now to when ETFs first hit the market, or if you go back even further, when mutual funds first became popular investing vehicles," Mr. Eplett said.

Not every adviser is convinced. While there are positives to relying on model portfolios, Delphi Advisers president and chief investment officer Ben Lies is skeptical of how much they can help with performance or costs. While they may help increase AUM, moderls are just as likely to underperform as the average portfolio manager.

"On the adviser front, portfolio engineering is difficult and incredibly time consuming," Mr. Lies said. "When an easy option like "model portfolios" pop up, which are also easy to sell, some advisors will do it, disregarding the fact that they may no longer be actually earning the fee they charge and also making their services more expensive to clients in many cases."

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