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Why More Advisors Are Using Model Portfolios: Envestnet Exec

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Platform provider Envestnet continues to see growth in its model portfolio business and expects that to continue, despite the volatility in the markets related to the novel coronavirus, according to Tim Clift, chief investment strategist at Envestnet PMC.

“That’s one of the fastest growing areas on our platform and it has the most interest from financial advisors,” he said in an interview on March 11. Its third-party model portfolios from firms including American Funds, BlackRock and Vanguard included assets of about $74 billion as of Sept. 30, he said, noting that this asset level represented “30% year-over-year growth” and it has been growing each year.

Those models include mutual funds and exchange-traded funds “across the risk spectrum” from about 150 firms, with the total number of underlying models offered coming in at about 1,500, he said.

The number of firms offering model portfolios on Envestnet’s advisory platform is up from probably about 135–140 a year ago, he noted. Although Envestnet has added some new companies, most of the major asset management firms already have products on the platform, he pointed out.

Those firms are, however, continuing to add more suites of products, he said.

More than 100,000 financial advisors use Envestnet’s platform overall and the number of them using model portfolios is “more than half for sure,” he said. That growth “trend is on the upswing and the younger advisors are definitely using models more and more often,” he added.

“More and more advisors’ practices are moving over to models” because they like the fact that they save advisors time and tend to increase the value of their practices, he said. In addition, if a firm is not using models and the technology that they enable, “it’s really hard to grow their business,” he said.

When they want to sell or otherwise “monetize their practice at some point,” advisors are realizing that “it’ll have a much higher multiple on their practice if they’re using models — if they are not the brains behind” all the investments being made at the firm, Clift explained.

After all, if they are indeed the entire brains behind their firms’ strategies and they leave, “then the value-add to their clients has disappeared,” he added.

Another reason their practices are “worth a lot more” with models being used is that asset allocation and fund selection have “become a commodity, and you’ve got to outsource that because you’re not really getting paid back for that” now, he said.

Coronavirus Impact

The company has been “pleased to see the flows” for model portfolios “not necessarily slow down significantly,” and it hasn’t seen many redemptions since volatility increased due to the coronavirus, Clift said.

That is because “these models are generally all part of a financial plan” in which the advisors have “sat down with their clients and this is their long-term plan for 20, 30 or 50 years, and this is the allocation that’s appropriate” for the clients, he explained. “You’re not seeing the turnover and the short-term redemptions coming out of the models that we’re seeing broadly across the market.”

However, Clift said he has “seen certainly a lot more communication than you would typically have this time of year” between asset managers and their clients and advisors, as well as between advisors and their clients. “The clients that have been calling that are more panicked are the ones that are not in models — that are doing their own thing” in many cases, he noted.

Advisors are “educating their clients” that we have had viruses and epidemics in the past and they typically “run their course and now is not the time to change the overall plan,” he said. Clients — at least so far — have been “generally waiting it out.”

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