Displaying items by tag: model portfolios

In an article for AdvisorHub, Lisa Fu covers a recent research report from Cerulli Associates which shows that portfolios managed by CIOs outperform those managed by advisors over multiple time frames. Over the last 3 years, model portfolios earned a 1.8% annual return which beat the 1% return of advisor-managed portfolios. The outperformance was similar on longer timeframes as well. 

Further, the outperformance was even stronger during periods of market volatility. During negative quarters over the last decade, model portfolios outperform 60% of the time. Model portfolio performance was also more consistent while advisor-led portfolios have much wider dispersion in terms of results. 

Of course, this is an indication that most advisors are better off using model portfolios which frees up more time to focus on operating a business, prospecting for new clients, and investing in client services and relationships. 

Many older advisors are resistant to giving up these responsibilities given that it was an integral part of the job for so many years. Yet, firms are encouraging younger advisors to go with model portfolios due to better outcomes for clients’ portfolios and more time and energy for tasks and actions that are more correlated with success.

Finsum: A research report from Cerulli Associates shows that model portfolios perform better than advisor-managed portfolios.

In a strategy note, Scott Welch, the CIO of Model Portfolios at WisdomTree Investments, discusses how markets are unusually calm right now but from a seasonal perspective, investors should get ready for a surge in volatility. 

Currently, markets are at their ‘calmest’ since prior to the pandemic, this is evident through the Vix or credit spreads although bond market volatility is elevated. Historically, volatility does tend to increase between September and November especially as trading volumes increase, and people become more mindful of risks.

According to WisdomTree, markets are currently not accounting for a slowing economy, hawkish Fed, and geopolitical tensions. The firm recommends that investors prioritize quality in their portfolios by prioritizing cash flow, strong balance sheets, and operational efficiency as these companies are best suited to handle a downturn in economic conditions.

The second consideration is sufficient diversification at the asset class and risk levels. This is a necessary antidote as many investors are tempted to veer away from their plan during these periods of volatility. With proper diversification and rebalancing, these periods can be used advantageously. 

Finally, it recommends investing in less followed parts of the market like managed futures, floating rate Treasuries, or commodities. These alternative asset classes can also provide additional diversification while outperforming in volatile markets. 

Finsum: WisdomTree shares some thoughts on the current state of the market, and why investors should prepare for a surge in volatility.

The efficient frontier is defined as the set of portfolios which maximizes expected return for a given level of risk. The theory was developed by Nobel laureate and economist, Harry Markowitz, and has become an integral part of modern portfolio theory. The most common application of the efficient frontier is to optimize the amount of diversification in each portfolio. 

Efficient frontier is used to figure out the ideal balance between returns and risk through the use of diversification. It’s based on historical data and correlations to calculate theoretical returns and ideal weightings in a portfolio. 

It can help investors figure out how much diversification is necessary given an individual’s risk tolerance. Greater diversification can dampen variance and risk while still maintaining the same level of long-term returns. 

Efficient frontier is used to construct model portfolios to ensure sufficient diversification and appropriate rebalancing. They can also help identify when the portfolio is getting diminishing returns from taking on risk. 

One drawback to the efficient frontier is that all of these calculations are based on historical data, and there is no guarantee that future returns will be similar to that of the past. It also assumes that returns follow a normal distribution, however this has simply not been the case in many years. 

Finsum: Efficient frontier is used by portfolio managers to determine the ideal balance between returns and risk. It’s an integral aspect of modern portfolio management theory.

More and more, in recent years, especially, model portfolios are finding their mojo, according to wealthsolutionsreport.com.

Within the financial advice industry, they’re hitting traction and, for wealth managers, have evolved as a solution – and a compelling one, at that.

In 2020, the estimated value of assets under management in model portfolios hit $3 trillion. The catalyst? To a degree, exchange traded funds don’t take as big a hit out of the wallet. Not only that, the fact the trend toward comprehensive financial planning strategies is ongoing.

Meantime, a little time travel, anyone?

In the next five years, the model portfolio realm of money management is expected to balloon to a business of $10 trillion, BlackRock Inc, expects, according to advisorhub.com.

“It’s going to be massive,” said Salim Ramji, global head of iShares and index investments at the asset manager, on Bloomberg Television’s ETF IQ. “It’s the way in which more and more fiduciary advisers are doing business, and, as a result, that’s the way in which we’re doing business with them.”

The landscape for financial advisors has shifted rapidly over the last decades. And, these shifts are only accelerating in terms of frequency and impact. Thus, advisors also need to update their strategy and approach to thrive in this new environment.

A major change is that advisors have to work harder to get and keep clients, especially given that many other money managers are likely competing for clients' resources, time, and attention as well. 

For Financial Planning, John Guthery discusses why advisors should start embracing model portfolios to align their business with this new environment. Increasingly, the most value that an advisor brings is through quality time spent communicating with their clients to understand their needs and plan appropriately. This is true for both parties. 

Too many advisors are spending too much time managing portfolios and researching investment ideas, when they could instead be focused on tasks that will actually grow their business. Most long-term research shows that advisors fail to beat the market over long periods of time.

With model portfolios, this function is effectively outsourced so that advisors can spend more time on the tasks that actually move the needle in terms of building and operating a thriving practice. 

Finsum: Financial advisors tend to feel like they are not spending enough time with clients. Model portfolios are one solution as it frees up time for advisors.