The Evolution of Model Portfolios: A Deep Dive with Envestnet

Model portfolios are evolving, offering a significant advantage for advisors and asset managers by streamlining operational tasks and fostering stronger client relationships. These tools are set to become increasingly personalized, harnessing technology to deliver improved outcomes and increased client retention.  

Is there a major shift on the horizon? With the integration of private markets and semi-liquid investments, how will the future distribution strategies of model portfolios be reshaped? Stay tuned for the next wave of progress in model portfolio management. 

The Big Picture In Practice podcast team sat down with Ling-Wei Hew, a Principal Director at Envestnet and a veteran in the model portfolio space, to get her expert insights. Hew took us on a comprehensive journey through the evolution, present state, and the future wave of progress in model portfolio management. 

With her experience in due diligence and portfolio construction, Ling provides us with a wealth of knowledge that offers an invaluable insider perspective on the trends shaping the investment landscape.

Ling shared considerable insights into the evolution of model portfolios based on her vast experience. Recollecting her earliest experiences, she said, "model portfolios were a novel way to bring sophisticated asset allocation portfolios to retail investors, which were previously only available to large institutions like pensions and endowments." And even throughout their evolution, she stressed the importance of hands-on work as model portfolio management continues to grow.

Today, according to Hew, the landscape of the model portfolios space is highly competitive, with larger asset managers dominating and offering zero management fee structures. She commented that advisors have embraced this evolution, as "it has helped them outsource various operational and investment-related aspects of their businesses." 

Asset managers are praised for their high-quality marketing materials and performance commentary, though Hew observed a need for improvement in understanding the needs of retail investors and improving sales strategies.

When conducting due diligence on model portfolios, Hew advised checking for areas such as firm, people, process, performance, and price. She warned against managers who launch models that follow hot trends outside their core capabilities, and cautioned against distribution issues that may lead to client burnout.

"There are low barriers to entry, but barriers to success are high," expressed Hew as she dove into the current state of model portfolios. She spoke about the ongoing evolution in this space, focusing on how larger asset managers have moved towards offering models with zero management fees. Yet, she cautioned about the potential pitfalls for those who follow the trendy, hot-button topics outside their area of expertise: "A red flag is launching models that follow hot trends outside of core competencies."

Trust, as she mentioned, is the cornerstone in this journey. With model portfolios, transparency and open dialogue are major ingredients. Top model providers go beyond the portfolio itself — they communicate their philosophy and approach, fostering trust and confidence with gatekeepers and advisors.

According to Hew, private markets hold potential for model portfolios, but it's not without its challenges. Hew sees a place for private markets within model portfolios, indicating that they can offer additional tools for portfolio managers to deliver better risk-adjusted outcomes. There is, however, an emphasis on understanding private markets thoroughly.

“I think that private markets add another set of tools and levers for portfolio managers to try and deliver on better risk adjusted outcomes depending on the market environment," shared Hew.

Ling-Wei Hew shared her vision on the evolving economic landscape and its effect on model portfolios. Fee compression continues to erode profit margins, but she believes the game-changer lies in the distribution. The trend is towards fee compression, and larger asset managers are dominating the space by offering zero management fee structures or repackaging models with proprietary funds.

On the matter of distribution, Hew has observed an evolution towards deeper relationships with fewer partners, facilitated by developments in technology. The traditional boots-on-the-ground approach of salespeople meeting with advisors regularly remains vital to successful distribution.

Transparency, open communication, and understanding between model providers and due diligence teams are key for building trust and confidence in model portfolios, according to Hew.

Looking towards the future, she envisions the model portfolio of 2035 as personalized offerings at scale facilitated by technology for better client outcomes. Despite the significant role technology will play, Hew believes human interaction and understanding client needs will remain crucial in the future of model portfolios.

"I think with technology, we're going to be able to achieve personalization at scale such that the standard household model will have access to customized offerings,” said Hew. “I'm hoping this will translate to better stickiness and staying invested, which will ultimately lead to better client outcomes.”