When using model portfolios, keeping it simple often yields the best results, said speakers at Inside ETFs+, part of Wealth Management EDGE at The Diplomat Beach Resort in Hollywood Beach, Fla.
Advisor adoption of actively managed portfolios will continue to grow for some time because the products simplify advisors' lives, noted John Davi, CEO and founder of Astoria Portfolio Advisors. Advisors are using managed portfolios for a variety of functions, just a few of which include achieving higher returns. For many, this is a way to protect themselves from the unexpected. Using model portfolios also makes it easier to focus on achieving clients' insurance and tax planning objectives, while streamlining the process for advisers and ensuring succession planning, he said.
Darren Hinshaw, director of research with NBC Securities, added that model portfolios allow advisers to build core holdings for clients while leaving ample room for customization.
“You're talking about serious money being managed in a proper and sustainable way, and that's really going to help keep customers in down markets,” Hinshaw said.
Deborah Furh, founder and managing partner of ETFGI, noted that 61% of active funds failed to beat the S&P 500 on a one-year basis. On a five-year basis, this number reached 83%. Under these conditions, spending energy on asset allocation with a professional manager is more efficient than trying to pick the best performing fund, she said. And this has become much easier with current technologies.
So how should advisors allocate their clients' money? David recommends spreading allocations between the US and emerging markets for diversification. He mentioned that from 2000 to 2010, both the S&P 500 and the Nasdaq were down by double digits while emerging markets were up 160%. “These markets have value, and you have to combine value with growth,” he said.
Hinshaw said advisers can add liquid alternatives to their model portfolios as long as they already have those core holdings. However, he recommended adding them only if the adviser saw value in a specific fund, not because it's fashionable in the industry to talk about allocating a certain percentage of a client's portfolio to alternatives. In the long term, he said, alternative funds can become a drag because they tend to carry high fees and are often tax inefficient. As a result, there must be a well-thought-out reason for their addition.
All three panelists recommended including ETFs in portfolios because they tend to have low fees, are tax efficient and are easy to understand.
“Keep it simple,” Furh said. “You can get very fancy, but that doesn't necessarily give you better profits.”