ETF Issuers Face ‘Major Missed Opportunity’ in Model Portfolios

An overwhelming majority of investors would be open to use so-called model portfolios to guide their allocation decisions -- if only financial advisers did a better job of explaining them.

That’s the key conclusion of a study from WisdomTree Investments Inc., which surveyed over 2,000 investors and found that 86% of them would use prefabricated packages of exchange-traded funds, as long as they were properly spelled out by advisers. Across wealth management, some $2.7 trillion of assets are already mapped to ready-made portfolios, according to Cerulli Associates.

That signals a “major missed opportunity” for the industry, according to Brad Shepard, head of adviser innovation at WisdomTree, which runs a model portfolio business.

“The variances between what investors believe versus reality are astounding, and it appears that the benefits and value of models are not being positioned properly by the adviser,” said Shepard.

While model portfolios have existed for years, ETF issuers are looking to the packages to power the next leg of growth for the $4 trillion industry. By outsourcing investment decisions to a third-party asset manager, the portfolios free up advisers for more client-centric activities, the thinking goes.

Model portfolios also take some pressure off issuers to come in ever lower on fees, as the ETFs can be positioned within these pre-packaged models instead of competing directly with other funds.

Goldman Sachs Group Inc. purchased Standard & Poor’s Investment Advisory Services LLC last March to increase distribution of its ready-made portfolios, while Vanguard has stepped up promotion of their own pre-packaged strategies.

Here are other findings from the study:

  • 56% of investors expect that the model concept will have a positive impact on their portfolio
  • 90% of millennials, 87% of Gen X surveyed were “extremely accepting” of advisers using model portfolios
  • 58% of investors are likely to switch to an adviser who uses model portfolios
  • Over half of those surveyed believe their financial adviser is already using model portfolios

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.