The Evolution and Popularity of Model Portfolios: A Conversation with BlackRock

You can listen to this and other episodes of the Big Picture in Practice podcast by Morningstar on all major streaming platforms. You can keep up with the latest episodes by subscribing to our Big Picture in Practice Newsletter.

Apple Podcasts | Spotify | Amazon Music | Pandora

According to Morningstar’s 2024 Model Portfolio Landscape, model portfolios have grown by 48% over the past two years. With assets already exceeding $4 trillion and poised to double to $9 trillion in the next five years, it is evident that they are transforming the face of asset management. "They are attracting advisors due to their ability to save time, meet client needs, and provide a seamless investment experience," Cout pointed out.

• Simplifying complexity: "Model portfolios offer a pre-fixed asset allocation solution that is diversified across various holdings," stated Cout. This allows advisors to outsource investment management, simplifying the complex task of individual investment selection.
• The importance of a steering wheel: Cout stressed that a portfolio manager's oversight is crucial to ensuring that the model portfolios align with client goals and can respond to market changes promptly.
• Focus on cost efficiency: Cost efficiency is a hallmark of model portfolios. By leveraging cost-efficient products like ETFs and tax-efficient strategies, clients benefit from a professionally managed, diversified portfolio at a significantly lower cost compared to similarly allocated mutual funds.
• Personalization and customization: As Cout highlighted, advisors are increasingly seeking personalized model portfolios that cater to their clients' unique needs, including access to private markets and tax-efficient solutions.

Model portfolios have several benefits for both advisors and clients. For advisors, they offer a scalable solution that allows them to efficiently manage multiple client accounts without sacrificing personalized attention. They also provide access to top-notch investment strategies and expertise that may not be available to individual investors. As for clients, model portfolios offer diversification, risk management, and cost-efficiency by pooling assets together with other investors. Despite their benefits, they often require higher investment minimums, which can be a barrier for some investors.

At BlackRock, Cout explained that their approach to model portfolios is designed around the principle of simplicity and customization. "We believe in keeping things simple for our clients while allowing room for customization based on their unique goals and preferences," she said. This philosophy is reflected in the incorporation of both passive and active strategies in their model portfolios, providing clients with a balance between cost-efficiency and potential for alpha generation.

BlackRock is dedicated to supporting advisors who subscribe to its models by providing a seamless and effortless experience. This has been achieved by constructing the platform based on invaluable feedback from clients and investors, thereby ensuring that advisors find it simple to access, customize, purchase, rebalance, and explain the model portfolios to their clients. As Eve points out, BlackRock provides advisors with easy access to its model portfolio platform.

Secondly, BlackRock shows support by giving advisors a wide range of investment options within the model portfolios. Eve acknowledged that more than half of all advisors do not exclusively use BlackRock solutions. To this end, the platform is open architecture and includes non-proprietary funds. This level of flexibility empowers advisors to tailor the model portfolios to perfectly meet the specific requirements and preferences of their clients, hence allowing them to come up with customized proposals that align with their clients' objectives and risk profiles.

Lastly, BlackRock supports advisors by assisting them to navigate more complex products and client needs. Eve noted the increasing demand for personalized solutions, which include Separately Managed Accounts (SMAs) and access to private markets. The platform is designed to adapt and incorporate these sophisticated offerings while still maintaining the simplicity that advisors have come to associate with BlackRock models. By tackling the demand for personalization and branching into new arenas like SMAs and private markets, BlackRock empowers advisors to better cater to their clients and adapt to fluctuating market trends.

Technology has played a significant role in the growth and evolution of model portfolios. With advancements in data analytics and artificial intelligence, advisors can now efficiently construct and manage model portfolios tailored to meet specific client needs. At BlackRock, Cout mentioned that they utilize technology in various stages of their portfolio construction process, from data analysis to risk management.

Looking into the future, Cout discussed the upcoming trends in the sector. "The evolution of model portfolios incorporates complex products like separately managed accounts (SMAs) and the private market," she observed. However, she emphasized the importance of keeping these solutions user-friendly and easy to integrate into advisors' practices to encourage further adoption.

As with any rapidly growing industry, there are bound to be challenges. For model portfolios, these include regulatory scrutiny, fee compression, and competition from other investment vehicles such as ETFs. However, Cout remains optimistic about the future of model portfolios, emphasizing the potential for continued growth and innovation. "We are constantly exploring new ideas and solutions to enhance our model portfolios and provide even more value to our clients," she shared.

As we continue to watch the model portfolio landscape evolve, we see the core elements of simplicity, convenience, and client experience remain in focus. "By offering advisors a seamless and efficient investment solution, model portfolios are poised to play a significant role in shaping the future of wealth management," concluded Eve Cout. Indeed, our conversation with her perspective on the future of model portfolios, underscoring the importance of simplicity, personalization, and cost efficiency in promoting adoption and delivering value to clients.