Portfolio Construction Technology Advancement Intensifies Importance of Adding Value to Advisor Relationships
November 5, 2021 — Boston
Cerulli believes basic offerings are best delivered at no cost to the advisor, but asset managers may still have ability to charge for the most advanced technologies
This issue of The Cerulli Edge—U.S. Monthly Product Trends analyzes mutual fund and exchange-traded fund (ETF) product trends as of September 2021, defines the model portfolio outsourcer practice profile and portfolio construction process, and reviews opportunities for efficiency with portfolio construction technology.
Highlights from this research:
- Mutual fund assets fell to $20 trillion in September, losing more than 3% during the month. The asset decline was dragged down by passive mutual funds, which decreased 3.6%. Despite assets falling, net flows were positive during the month, with the vehicle adding $12.6 billion. ETF assets dipped 3% during September as assets receded to $6.6 trillion. Major market indices were all down by more than 4% so the asset decline was certainly buffered by positive net flows, which totaled nearly $75 billion during the month.
- Increasingly, model providers are offering open-architecture model portfolios that incorporate both proprietary and nonproprietary investment strategies. Cerulli finds that model portfolios are increasingly using nonproprietary ETFs with an aim to reduce the overall cost of a model portfolio. Forward-looking key model product development initiatives include incorporating ESG factors/criteria into models, making models more tax-efficient for taxable client segments, and expanding customization potential.
- As portfolio construction technology continues to advance, it is crucial for firms to take advantage of opportunities to add value to their advisor relationships. As seen in many cases, Cerulli believes the basic offerings are best delivered at no cost to the advisor, where the asset manager hopes the tools will strengthen their relationship with the advisor to encourage increased client investment in their investment product offerings. Asset managers may still have ability to charge for the most advanced technologies as add-ons. Advisors are commonly using portfolio diagnostics (90%) and scenario analysis (90%) functionalities, along with portfolio optimization (89%) when offered, though portfolio optimization is an offering found less often in tool packages (62%).
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