Merrill Lynch is looking to external help to boost advisor usage of its model portfolio program.
The wirehouse is adding 40 portfolios designed and managed by BlackRock, JPMorgan, Franklin Templeton and Natixis Investment Managers. Executives at Bank of America, which owns Merrill Lynch, hope that with the 165 options to choose from, more of its 14,000-plus advisors will embrace the program and gain the efficiencies that come with it.
“A model-based practice helps [advisors] achieve scale by reducing administrative tasks and gives them more time to spend with clients,” says Sandy Bolton, head of managed investments for Bank of America.
Merrill’s program and others like it are part of a growing trend of advisors spending less time on portfolios to focus on other aspects of the business.
Lack of time is the biggest constraint on advisors' growth, says Scott Smith, director at research firm Cerulli Associates. “They have so much on their plates,” he says.
Cerulli estimates that approximately 150,000 advisors managing $5.8 trillion in total client assets could benefit from embracing model portfolios.
Advisors typically spend up to a third of their workweek on portfolios — and outsourcing that task can be liberating. Smith compares it to changing a car’s oil: You can do it yourself, but going to Jiffy Lube may be a better use of your time.
Yet while the benefits of model portfolios may be clear, adoption remains low. Only 13% of advisors indsutrywide primarily rely on third-party models for their client portfolios, according to a Cerulli survey. Sixty-two percent of advisors say their own practice’s research is the primary driver of their client portfolios, while 25% rely on resources provided by their home offices.
For asset managers, providing model portfolios is a smart way to get advisors to use their funds.
“They want to be Toll House cookies,” Smith says, referring to a Nestlé brand of chocolate chips known for its popular cookie recipe printed on the packaging. “For years, they [asset managers] have been selling ingredients. They go into an office and say ‘Here’s my fund and why you want to use it.’ But now, the discussions are turning more to the recipes rather than just the ingredients … ‘Oh I see your exposure for international markets is at 20%. We’re at 10%. Let me tell you why.’”
Merrill’s model portfolios are exclusively available through its investment advisory program and require a minimum initial investment of $50,000, according to the company. A model portfolio is comprised of about 10 to 20 funds, Bolton says.
“We don’t charge asset managers any revenue share to be part of the investment advisory program. So there’s no fee paid from an asset manager to us,” she says.
The wirehouse already offered 125 portfolios managed and vetted by its chief investment office intended to cover a variety of client goals and risk tolerances. The third-party additions will provide more tactical options, Bolton says. And advisors can anticipate more on the way, she adds.
Currently, 9 in 10 Merrill advisors use CIO models in their practice. A quarter of advisors manage 25% or more of their client assets in model portfolios, according to the firm.
“We’ve had good growth through the CIO managed portfolios. Financial advisors are seeing the value and opting into them,” says Joe Curtin, head of CIO portfolio management for Bank of America.
