A new report from market research firm Cerulli Associates finds that most financial advisors expect just that give preference to the use of model portfolios on the funds of funds going forward because of the higher level of personalization model portfolio offer. According to the report, 61% of advisors surveyed expect to prioritize model portfolios over funds of funds.
A survey of nearly 2,000 advisers conducted repeatedly over the past year found that 44% of respondents used funds of fund structures and only 8% expect to increase their use of these vehicles going forward. At the same time, almost every wealth manager today is using model portfolios, according to Matt Apkarian, associate director of product development with Cerulli.
Cerulli's survey shows that 23% of advisors primarily create custom portfolios for each of their clients. That means the remaining 77% are either using model portfolios provided by third parties or creating models within their own practice, Apkarian noted. “But I bet the number is even higher because even advisors who primarily build custom portfolios, I can almost guarantee they have some clients who are committed to a model,” he said.
While advisers already use mutual funds because they are more closely related to retirement plans, they also have concerns about whether mutual funds' fees are justified by the value they provide, Cerulli found. Apkarian said the average distribution fund's expense ratio ranges between 36 and 45 basis points. However, some underlying funds in funds of funds charge their own fees, creating a multi-layered fund structure. This is less common in the model portfolio space because most asset managers have eliminated their strategist fees, he noted.
More importantly, however, the use of mock-up portfolios allows financial advisors to appeal to clients' desire for customization.
“I would expect that now you're able to present your firm's value proposition as an advisor when you use something like a template a lot, because there's the ability to see the individual building blocks, there's the ability to add customization, there's the ability to add different animations and tell your client 'You're not getting the same thing everyone else is getting by buying shares of this fund of funds, because we're able to add personalization'”.