Wealth managers are eager to deploy model portfolios in their client accounts, thanks to models’ ready availability, transactional convenience, and the increasingly broad array of model offerings. While advisors often use a target risk model portfolio as the cornerstone of a client’s portfolio, they may be increasingly eager to blend other types of models alongside their core risk/return model.
Demand for new types of model portfolios may well be driven by investors’ eagerness for exposure to unique, sophisticated assets. In a recent study from BlackRock and Institutional Investor’s Custom Research Lab, a solid majority of wealth management clients (60%) say it is extremely important that their advisor has access to and knowledge of investment products of which clients are unaware.1 In this same study, a majority of wealth advisors (53%) say they’re eager to invest client funds in sophisticated financial products containing private market assets, hedge funds, private equity, and private credit, which are typically available only through investment professionals.
“When we think about model portfolios that are really popular today, we see a shift in the last couple of years from core asset allocation in target risk models to things that are outside the box – in asset classes that may be difficult for a financial professional manage from day to day on their own,” says Katie Baker, Senior Director of Model Portfolio Distribution at John Hancock Investment Management. These portfolios are typically focused on a particular asset class or portfolio management problem, says Baker: “We think about fixed income portfolios, alternative asset portfolios, and other types of investments that are outside your typical core model portfolio. These are becoming much more popular and much more in demand. And as asset managers, we need to ensure we provide products to financial professionals that they want to use every day in areas that they find difficult to manage.”
In the recent BlackRock/II Custom Research study, wealth managers appear to be especially eager to have alternative assets made available through model portfolios. A solid majority of the 500 wealth managers participating in the study say they’d like to have private equity (87%) and private credit (66%) exposure available in model portfolios (see figure below).
Advisors say that they supplement the baseline exposure provided by a target risk allocation with one or more models that are tuned to a particular portfolio management problem. “The majority of our advisor clients are looking for standard multi-asset target risk portfolios composed of equities, fixed income, and sometimes alternatives blended in different risk tolerances,” says Karl Desmond, Lead Client Portfolio Manager of Invesco’s Model Portfolio business. These models are built, says Desmond, “all the way from 100% fixed income up to 100% equity, with different increments in between,” tuned to advisory clients’ risk tolerances.
Advisors Call for Exposure to Private Market Assets Through Model Portfolios
Most recently, says Desmond, “We're seeing a lot of demand for model portfolios from financial advisors looking to scale their business and create a consistent investment approach across their book of business. But in particular, custom model portfolios is where we see the most demand. At Invesco, we're able to co-develop these portfolios – that is, we can sit down with advisor teams and build model portfolios based on their investment philosophy and other requirements, such as the inclusion of preferred alternative asset classes” He and his team also provide co-branded marketing materials, advisory firms’ logos and names on product fact sheets, trade rationales and performance commentaries. As a result, Desmond says, advisors are able to offer ready access to best-in-class investment products quickly and cost effectively.
“Advisors are likely to continue to base client portfolios on standard risk/return oriented portfolios”, says Adam Grossman, Global Equity CIO at Riverfront Investment Group: “There tend to be a few common types of models that are in demand for clients – the largest and the most common are accumulation or growth-oriented models, which are built around the idea maximizing total return subject to a level of risk. And these are far and away the most common models in the marketplace.” These models are well-suited to the wealth accumulation stage, when advisory clients are still building their wealth as they approach retirement.
Grossman expects two other types of model portfolios to become very popular in the years to come. “In the next phase, when clients begin to take systematic withdrawals out of their accumulation, income models are increasingly popular. And for people who may not have enough principal to completely move to a distribution phase, a hybrid of total return and income/drawdown models may well be the most suitable,” says Grossman.
1 BlackRock and Institutional Investor. “Model Portfolios: A New Generation of Investment Solutions for Wealth Managers and Their Clients.” October 2024.
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