Clients Want Model Portfolios, But Most Advisors Don’t Explain Them Well

An overwhelming majority of investors would be open to use so-called model portfolios to guide their allocation decisions -- if only financial advisors did a better job of explaining them.

That’s the key conclusion of a study from WisdomTree Investments Inc., which surveyed over 2,000 investors and found that 86% of them would use prefabricated packages of exchange-traded funds, as long as they were properly spelled out by advisors. Across wealth management, some $2.7 trillion of assets are already mapped to ready-made portfolios, according to Cerulli Associates.

That signals a “major missed opportunity” for the industry, according to Brad Shepard, head of advisor innovation at WisdomTree, which runs a model portfolio business.

“The variances between what investors believe versus reality are astounding, and it appears that the benefits and value of models are not being positioned properly by the advisor,” said Shepard.

While model portfolios have existed for years, ETF issuers are looking to the packages to power the next leg of growth for the $4 trillion industry. By outsourcing investment decisions to a third-party asset manager, the portfolios free up advisors for more client-centric activities, the thinking goes.

Model portfolios also take some pressure off issuers to come in ever lower on fees, as the ETFs can be positioned within these pre-packaged models instead of competing directly with other funds.