Envestnet rides boom in model portfolios

Brooks Friederich is a little-known figure in the world of investment advisory, even among the Wall Street cognoscenti. Yet every year, the 39-year old — and his Berwyn, Pennsylvania-based employer Envestnet — helps steer billions of dollars into tailor-made strategies for financial advisers, part of what’s known as the model portfolio boom.

By providing a platform that offers around 2,000 customized products from some 150 asset managers, Envestnet is tapping into rising demand from retirement accounts and the like for bespoke portfolios — combining stocks, Treasuries, credit and more. As such, Friederich is becoming an intermediary in a multitrillion-dollar business opportunity for titans such as BlackRock Inc. and Vanguard Group.

Founded in 1999, Envestnet now serves some 100,000 advisers and has overseen a total of $300 billion in model-portfolio trades. That’s giving Friederich an insight into the allocation decisions of investors with big money at stake. And right now, he says, they’re getting cautious about some of the year’s biggest stock winners as valuations soar.

“End clients are saying, ‘I want an investment product that isn’t going to have all this exposure to the big-tech stocks,’” said Friederich, principal director of research strategy at Envestnet. “If you look at retirement portfolios, they all have too much exposure to that because of the construction of the market.”

Mega-cap U.S. technology companies are among the best-performing equities this year thanks to a frenzy for anything linked to artificial intelligence and perceptions that interest rates — seen as a threat to growth stocks — have peaked. 

Meanwhile BlackRock recently projected that the model portfolio realm could grow to a $10 trillion business over the next five years from around $4 trillion currently. The investing giant and the likes of Charles Schwab have benefited by packaging their own products into the off-the-shelf strategies, while Envestnet serves as a tech-powered intermediary.

“We have open architecture and we’re one of the largest platforms in terms of products out there in the industry,” Friederich said.

The allocation approach isn’t without its critics. The latter have argued that these opaque models are channeling billions into funds with questionable performance. Still, their easy access and relative cheapness — most are made up of low-cost ETFs — have made them a hit with clients. 

Friederich says the popularity of model portfolios is down to the ease with which they combine different asset classes. A more traditional approach using a separately managed account, or SMA, tends to focus on a single strategy or investment style, like large-cap growth or value, he said.

More than half the assets on Envestnet’s platform are in 60/40 or 70/30 strategies, which overweight stocks with the rest flowing into fixed income. Despite last year’s backlash against the balanced investment style — as bonds failed to hedge equities in the great inflation crisis — demand among older investors remains strong, according to Friederich.

“They want moderate risk tolerance, which gets you to 60/40,” he said.