UK Wealth Managers Show Strong Appetite for Model Portfolios | ETF strategy
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According to a recent survey by Cerulli Associates, UK wealth managers are expected to increase their use of model portfolios over the next two years, which will drive ETF adoption.
Almost half (46%) of UK wealth managers plan to use model portfolios more over the next 12-24 months, compared to just 2% who plan to reduce their use over the same period.
Currently, only 14% of survey respondents do not use model portfolios for their clients.
Greater efficiency has proven to be the key driver behind the growing adoption of model portfolios in the UK wealth management space, with advisory firms turning to external solutions so they can focus financial planning rather than investment management.
Fabrizio Zumbo, Director of European Asset and Wealth Management Research at Cerulli Associates, said: “The increased use of model portfolios, from the perspective of advisors, is the simplification of proposals and activities, enabling greater efficiency and scalable customer management – and ultimately, reduced costs.
“Advisors can also ensure their clients are invested in line with the house’s vision, creating greater consistency in client outcomes.”
UK wealth managers also indicated that commercial considerations have a positive impact on the demand for model portfolios. Historically, multi-manager proposals generally incur higher fees; however, managers who construct model portfolios using ETFs have been able to reduce the cost of investing in a full portfolio context while providing diversified market exposure.
These inherent advantages of ETFs have led to a dramatic shift in asset flows, highlighting the potential for even greater use of model portfolios to drive another nail into the coffin of mutual funds.
According to Cerulli, however, while cost considerations will continue to be the order of the day and contribute to the decline of mutual funds, the UK platform market, which is leading the way in terms of offering discretionary services , did not track the ability to use ETFs from a technology perspective.
Cerulli also notes that many wealth managers view model portfolios as complementary to mutual funds, as asset allocation and manager selection are considered key features of model portfolio services.
Finally, mutual funds offer a different level of flexibility and access to the widest investment universe. Decisions are implemented much faster – real-time intraday decision making compared to typical quarterly rebalancing of a model portfolio.