the marketplace for model portfolios is reaching new heights as
more banks add unified managed accounts to their product menus. The
packages even include tax planning, as Charles
Davis reports.
Model portfolios – investment scripts bought wholesale from
third-party asset managers and implemented by bank trust
departments to develop unified managed accounts – are on pace to
top $385 billion of managed assets within the next five years,
according to a report from the Money Management Institute (MMI) and
Dover Financial Research.
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This is regarded by experts as astonishing, given that total assets
in model portfolios reached $91 million in June, the report said.
That five-year figure would amount to 48.8 percent of the total
advisory market for separately managed accounts, up from 11.5
percent in June.
In model portfolio programmes, a third-party asset manager hands
over its investment model to an overlay manager within bank trust
departments. Overlay managers can be third-party providers or in
some cases major distributors such as brokerage firms of banks. In
this type of programme, the asset manager is often no longer
involved in the management of the model or the underlying assets, a
sea change in the relationship many asset managers have had with
individual investors.
The overlay managers can tailor the models to minimise taxes or
avoid investments that clients find objectionable. All of that is
made easier through the use of unified managed accounts, which put
a range of investments on one platform, the study said.
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By GlobalDataModel portfolios mean the asset manager becomes a research provider
and strategist, submitting to clients a model portfolio of
securities. The overlay manager is responsible for all execution
and trading. This separation of research and strategy by the
manager and implementation by the overlay provider will lead to
increased efficiencies in the portfolio.
Unified managed accounts (UMAs) can contain a range of investments.
Separately managed accounts (SMAs) are similar but are limited to
wealthy investors, because one account is required for each
investment type. Several large US banks, including U.S. Bancorp,
Bank of America and SunTrust Banks, started their own unified
managed account platforms in the past year.
Unlike the traditional system of linking a client’s portfolio to
the money manager, often through a separate account sponsor
platform, the model portfolio shifts virtually all the trading and
administrative responsibilities from the money manager to the
programme sponsor.
In the most basic sense, a model portfolio is presented daily or
weekly by the money management firm as a list of the latest
holdings in a particular strategy. The sponsor or adviser is
responsible for making adjustments to client portfolios based on
whatever changes have been made to the manager’s model
portfolio.
Efficient investing
According to the new report, model portfolio programmes benefit
investors by providing an efficient way of delivering
comprehensive, customised financial solutions, including tax
management, in the form of a single account. “In some way,
managers’ enthusiasm for model portfolio programmes may seem
counter-intuitive, as this changes both their relationship with
investors and fee structure,” said Christopher L Davis, president
of MMI. “However, the data suggests there are broad advantages for
the investor, and ultimately that is what is going to drive the
market.”
Unified managed accounts driven by model portfolios let outside
managers make investment recommendations without executing the
trades, freeing banks from the fiduciary responsibilities inherent
in SMAs.
Model portfolio programmes are already used for more than 60
percent of assets in unified managed accounts and related offerings
called multidiscipline products, according to the study. In the
last four years the number of asset managers participating in model
portfolio programmes more than doubled, to 214 from 90, according
to the institute. Those firms range from fund companies to
institutional money managers.
For financial advisers and their clients, the model-portfolio
format is expected to increase the use of customisation and
tax-efficiency features. Some managers even predict that greater
use of model portfolios could lead to lower management fees for
investors while better addressing client expectations.
Driving force
Within five years, model portfolios could represent more than half
of all separate account assets. The driving force behind the
growing popularity of model portfolios is demand from wirehouse
firms and various platforms designed to bring together a range of
investment vehicles and strategies.
Many of the platforms have already developed unified managed
accounts that allow the adviser to fold into a client’s overall
portfolio a separate account portfolio that could include
individual stocks, mutual funds and a range of alternative
products.
Model portfolios also offer lower costs, and could drive fees even
lower. According to industry estimates, money management fees for
model portfolios generally range from 0.25 to 0.4 percentage
points, compared with a range of 0.32 to 0.5 percentage points for
the traditional method of managing the assets in separate accounts.
While lower management fees could cause some money managers to
resist model portfolios, their popularity likely will be boosted by
the increased ease of use and greater flexibility.
Beyond the tax optimisation and trading efficiencies, UMAs under
model portfolios offer administrative simplicity. For one thing,
advisers have consolidated oversight. Additionally, because they
can handle many different vehicles and asset classes, advisers
using them can more easily diversify portfolios.
Not only does a model portfolio deliver aggregated information on
the back end and a process on the front end that simplifies
administration, it also provides the ability for a sponsor firm or
financial adviser to manage the portfolio for tax purposes,
customisation, rebalancing or whatever the firm wishes to
offer.
At a time when investors are becoming more sophisticated, it has
been difficult for banks to justify not offering a wider menu of
outside investment options. Model portfolios might just be the
answer.
