Model portfolio assets hit $4.1 trillion in Q3

Assets in model portfolios are gaining traction as advisers continue to shift their value proposition from portfolio manager to financial wellness planner.

In fact, volatility caused by the COVID-19 pandemic helped drive model portfolios to an estimated $4.1 trillion in assets at the end of the third quarter as more advisers adopted models, according to a report by Broadridge Financial released last month.

More than 240 new models were added during the third quarter, bringing the total number of Broadridge tracked models to more than 13,000.

The increase in model portfolios is up from a slight contraction seen during the first quarter when assets in model portfolios dropped to $3 trillion, a 16% drop compared with the fourth-quarter of 2019 as the selloff related to COVID-19 racked the economy.

Of the estimated $4.1 trillion assets in model portfolios, Broadridge used its model portfolio algorithm to identify $1.3 trillion in assets — or about one-third of total industry model portfolio activity — to further dissect industry trends.

In that light, 19% of Broadridge’s $1.3 trillion model dataset were in adviser-led model portfolios. By comparison, home-office and third-party model portfolios were 55% and 26% of assets, respectively.

Financial advisers had 64% of their fee-based advisory assets in model portfolios as more than half of advisers are expected to increase model usage, according to the study.

Exchange-traded funds have been the driving force behind model portfolio growth accounting for 44% of assets, according to Broadridge. ETF annual growth clocked in at 16% compared with mutual funds (8%) over the last two years. Advisers are favoring hybrid model approaches — using mutual funds and ETFs to complement each other, according to the study.

The popularity of model portfolios has been evident as large industry players — like Envestnet and Franklin Templeton — have ramped up offerings to keep up with advisers looking to outsource investment management and focus on other parts of the advice business.

However, the increasing demand from advisers to gain access to inexpensive and effective outsourced investment models wasn’t enough to keep Oranj’s platform from shuttering operations by year’s end.