‘Off-the-shelf’-style portfolios, like those offered by investment management company Vanguard are radically transforming the advisory services business. Prefabricated model portfolios that takeover the task of selecting the specific funds that going to client portfolios are enabling advisors to devote more of their time on developing long-term financial plans for their clients and coaching them through uncertain financial times.

“I think the future top advisors will be those that are the best planners, coaches and motivators, not the traditional best salespeople, financiers or mathematicians,” head of Fidelity Institutional Michael Durbin recently told Barron’s.

How Off-The-Shelf Model Portfolios Work

  •  Asset managers create portfolios composed of exchange-traded funds (ETFs);
  • Typically, any additional fees to those already associated with the underlying ETFs are non-existent or very small;
  • Advisors save time in selecting funds for client portfolios;
  • Advisors can spend more time coaching clients through difficult financial times, and with things like estate planning and tax management.

Source: Bloomberg

What it Means for Investors

Just as ETFs simplified the tracking of a particular index or sector by offering investors prefabricated groupings of stocks in their desired sector or index, the new model portfolios are simplifying the process of selecting a group of different ETFs.

Charging little to nothing extra for these pre-packaged portfolios, fund providers are using them as tools to keep advisors within their funds. Fund providers are marketing these new ‘ready-to-go’ packages to advisers as products that will save valuable time, allowing advisers to focus more on building client relationships than on what funds will go into their portfolios.

That pitch seems to be working as more and more advisors are turning to these model portfolio funds. Vanguard now has $15 billion of assets invested in its model portfolios. “It’s obviously freeing up tons of time to focus on clients,” investment advisor Jason Gladowsky of The Gladowsky Group in Smithtown, New York, told Bloomberg.

As retail investors increasingly eschew traditional advisors in favour of going out on their own or using robo-advisors, professional advisors are having to reinvent themselves.  The competition is putting downward pressure on the fees they charge and that means needing to manage more money to make up for the decrease of revenue for each dollar managed. But managing more money means finding appropriate vehicles for that money to be invested in, which is where the model portfolios are saving advisors valuable time.

Looking Ahead

The increasing prevalence of these model portfolios is shifting the traditional roles of professional investment managers—they are becoming more like life coaches. But it’s worth remembering that these life coaches still have to decide which is the best model portfolio for their clients, which means they still need to be able to tell a good investment from a bad one.