lead to active money manager outperformance.”
He added: “Opportunities for active money managers are
already building, as S&P 500 sector dispersion (the difference
between the best and worst sectors — tech vs. energy in 2019)
rose above the previous 20-year average in 2019.
“In addition, intra-sector dispersion, literally companies
that compete against one another, saw great diversion as well.
For example, brick and mortar retailers (that sell similar goods
to consumers) saw more than a 140% difference in their 2019
performance,” Adam explained.
Kitces isn’t so sure, noting that advisors “are so increasingly
focused on providing financial planning advice that ‘invest-
ments’ themselves are fading into the background; advisors
are simply focused on low-cost broadly-diversified portfolios,
‘just’ try to track the index results (net of fees), and focus their
“To some extent, this is simply an extension of the passive
investing trend, but it’s occurring for different reasons,” he
explained. “It’s not a matter of ‘we want to be passive because
we don’t think active adds value,’ and is simply ‘why bother
spending time trying to add value with active portfolio management when there’s so much more value to be added with
financial planning instead!?’”
Ginger Szala is executive managing editor of Investment Advisor. She
can be reached at firstname.lastname@example.org.
Model Portfolios & Volatility
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
“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.
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 com-
munication 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.” —Jeff Berman