Displaying items by tag: portfolio construction

In wealth management, the portfolio is the product and it’s crucial for achieving clients' long-term goals. Despite the additional services offered, the portfolio's performance is paramount. 

One key challenge is adapting portfolio construction to ever-changing market conditions, such as the recent shift to positive bond/stock correlations. Previously, low or negative correlations enhanced diversification benefits, but this advantage has lessened. 

As a result, professionals are exploring new ways to diversify, though it's important not to over-rely on these new methods. While increased correlations make reducing volatility more difficult and investors should turn to alts in these types of environments, a measured approach to diversification is essential to maintain long-term returns.

Finsum: Privates and alts are more necessary than ever to hedge the current increased stock-bond correlation. 

Unified managed accounts (UMAs) are professionally managed accounts that allow for the use of multiple investment strategies. This makes it a more comprehensive approach than a separately managed account (SMA) which is typically used for a single, targeted strategy. 

As of the end of last year, UMAs accounted for 26% of assets in managed accounts. Growth in UMAs is due to multiple factors; however, two recent factors are improved pricing and an increase in the number of investment options. 

With UMAs, different strategies can be used to construct a customized client portfolio that leverages the best strategies across different asset classes and investment managers. This allows advisors to optimize portfolios by blending various strategies and selecting managers with the proper expertise. 

This means that an advisor could use different managers for different asset classes, such as domestic equities, foreign stocks, and fixed income. UMAs can also allow for more granularity, such as having one manager for a core equity position and another for dividend stocks. 

UMAs also provide a comprehensive view of a client's finances, which means that rebalancing strategies are more effective, and there is more potential for personalization. This includes the ability to add custom models to a portfolio along with third-party ones. 

Finsum: Unified managed accounts are experiencing rapid growth and provide advisors with a more holistic and comprehensive view of a client's finances. 

Assets in model portfolios grew by nearly 50% over the last 2 years. By fully or partially outsourcing the investment management function, it frees up more time for advisors to focus on building their practice, client service, financial planning, and prospecting. According to a recent survey from Cerulli, 12% of advisors are using model portfolios primarily, with 22% using a hybrid approach. 

In addition to benefiting advisors, model portfolios have become a major distribution channel for asset managers such as Blackrock. Among asset managers, Blackrock has the most assets in model portfolios at $84 billion. Blackrock anticipates model portfolio assets exceeding $10 trillion within the next 5 years, more than doubling from $4.2 trillion currently. Model portfolios comprised 50% of flows from US investors into iShares ETFs last year.

WisdomTree is another major beneficiary of the boom in model portfolios. Last year, the company saw a 100% increase in the number of advisors using its model and had asset growth of 40%. It sees model portfolios as a ‘key growth driver’ for the firm in the coming years.

As model portfolios become a larger presence in wealth management, there will be large shifts of flows in and out of various ETFs depending on decisions made by asset managers. For instance, JPMorgan found that ETFs that were held in its model portfolios had significantly more inflows than ETFs not in model portfolios, at $80 billion vs. $30 billion. 

Finsum: Model portfolios are forecast to exceed $10 trillion in assets within the next 5 years. They are becoming increasingly integral for advisors and asset managers. 

Prudential conducted a survey of 198 financial advisors to gain insight on how they are investing and constructing portfolios for retirees. 80% use separate portfolios that are specifically designed for retirees. Additionally, the use of targeted portfolios was higher among advisors who were more knowledgeable about planning for retirement. 

Another takeaway from the survey is that 50% of retirees prefer to live off of income from their portfolios. Thus, advisors need to ensure that their portfolios generate income for clients while balancing other factors like total return and diversification.

In terms of asset classes for retirement portfolios, advisors favored long-term fixed income, US large-cap stocks, and TIPS. Advisors who were more knowledgeable about retirement planning favored long-term bonds and TIPS to a greater degree than less knowledgeable advisors. 

The survey also showed that most advisors are constructing retirement portfolios themselves or with the assistance of third-party recommendations or allocators. Advisors with less knowledge about the subject were more likely to outsource portfolio construction. 

Most advisors are helping clients plan for retirement by optimizing for goals such as flexibility in spending or timeframe. This is in contrast to other approaches, which include using a bucket strategy or segmenting the portfolio into different strategies for different purposes.

Finsum: Prudential conducted a survey of financial advisors. Those with more knowledge about retirement planning favored long-term bonds and tend to use differentiated strategies.

In the daily rush of managing your practice, finding ample time to focus on client relationships and business growth can be a challenge. According to Cerulli Advisor Metrics, advisors globally spend just 55.3% of their time on client-facing tasks, with the remainder consumed by administrative duties, investment management, and professional development. Some advisors opt to delegate investment management responsibilities to third-party firms, allowing them to devote more attention to client engagement and asset growth.

Introducing managed portfolios into your practice can yield several benefits, starting with addressing capacity constraints. With each client possessing unique goals and risk tolerances, crafting individualized plans and managing portfolios can be time-consuming. While some practices employ in-house specialists or investment teams, scaling these resources may prove costly and logistically challenging.

By recommending third-party discretionary portfolio management, advisors can access experienced professionals without bearing the burden of direct development expenses. This approach not only offers clients access to seasoned investment professionals but also frees up advisors' time for more client interaction and personalized service. Ultimately, leveraging professional portfolio management services can enhance efficiency, scalability, and client satisfaction within your practice.

Finsum: Its important to realize the that your expertise could be best served by being in the middle of a client and the portfolio construction leveraging technology to your advantage.