As financial advisors continue to embrace model portfolios, asset managers have been building up their offerings in the space. One of the world’s biggest asset managers, BlackRock, already provides over 150 different models with a range of options—including those that focus only on BlackRock funds or those incorporating BlackRock’s vehicles with third-party asset managers; ones that focus only on ETFs, only on mutual funds or a combination of both; portfolios that incorporate environmentally conscious investments; and those that are taxable and others that are not.
More recently, the firm has also announced partnerships to launch models incorporating private market exposure, including one with the Partners Group scheduled to debut this year, that will focus exclusively on private markets investments.
WealthManagement.com recently spoke with Joe DeVico, co-head of the firm’s U.S. wealth advisory business, to discuss the appeal of model portfolios to advisors, how BlackRock is trying to set itself apart in the model provider space and what kind of evolution we are likely to see in the space.
This Q&A has been edited for length, style and clarity.
WealthManagement.com: Can you talk about, from an asset manager’s perspective, the appeal of offering a range of model portfolio options? How do they help your relationship with the clients, particularly on the financial advisor side?
Joe DeVico: What we’ve seen are a couple of trends that are happening across the U.S. wealth universe. One is advisors are doing more with less, so they are looking to do more with scaled players that have a very robust platform across ETFs, SMAs and asset models.
The second big trend that we are seeing is advisors and wealth managers outsourcing more and more of their investments to things like SMAs and models and looking for more and more personalization within that.
The last thing is this desire to add more alternatives and private markets to those portfolios, to add more diversification, more non-correlated assets, and just give clients more access to private markets, which they didn’t have in the past.
What we have seen is this rapid, rapid rise in all the things model portfolios. If you just go back 10 years, the managed model business was really in its infancy. Today, you are hovering across the U.S. wealth universe, at probably close to $5 trillion. And we think that number is easily going to double over the next five years potentially, especially with the addition of more and more private markets in these models. So, both public markets and private markets sitting next to each other, we think it’s going to accelerate this space, and that’s why having a robust platform and giving our advisors more and more choice is paramount in helping them help their clients achieve their desired financial outcomes.
WM: We understand that BlackRock already has over 150 models. Do you plan to significantly grow your offerings? How?
JD: A lot of our models are custom models for either specific firms or specific businesses. Because of our scale, we offer that variety. We will continue to offer more models for our clients as our clients are asking for different versions or different types of models.
I think what you will see from BlackRock in the future is not only the evolution of our public market model business, but the addition of private markets into those models. That’s why you saw us strike a partnership with GeoWealth. That’s why you saw us strike a partnership with Vestmark, which enabled us to add private markets next to the public markets within the same portfolio, within the same model.
In addition, you’ve read about our partnership with the Partners Group, which is basically the first of its kind model portfolio that is entirely private markets across private credit, private equity, infrastructure and real estate.
WM: Looking at your entire line-up, including the public market models and models that include some private market exposure, have you noticed whether portfolios focused on certain goals tend to be more popular than others right now?
JD: What we have seen is a pretty good usage of many of our models. We are seeing models that are balanced, whether they are 60/40, 50/50 or 40/60 type of models, be very big and popular among our financial advisors. Our global allocation model portfolios and large allocation model portfolios have been very successful.
There isn’t one particular model. I think what advisors are looking for is a choice among their models providers. Because we are able to offer robust choice, I think that’s why we’ve had a lot of success because we aren’t just using one model, or one flavor of a model portfolio. Depending on the risk tolerance of their clients, they are able to choose from a robust set of models. I think that explains a lot of our success.
Obviously, our models perform really well; we surround [them] with great marketing and great education to help the advisor build their models practice.
WM: Do you offer any white-label model portfolios, where you help advisors build their own models?
JD: That’s our CMS line-up, our custom model solution franchise, where we build the model, we manage the model for the client or the financial advisor/wealth management practice, but they can white-label it. They can call it theirs, they can use a lot of our collateral, a lot of our marketing, but they get the best of both worlds. They get the industrial power of BlackRock coupled with their brand and how they want to talk about their business. We’ve had a lot of success there and because of our scale, we are able to do these custom models across our platform.
WM: You’ve mentioned the model portfolios you’ve been launching that either incorporate private markets exposure or the one with the Partners Group that’s completely focused on private markets. How have those been received so far? What kind of reaction have you been getting from advisors?
JD: We’ve gotten very, very positive feedback. They have not launched at this point in time. We are just beginning to launch our partnership with GeoWealth. We have a couple of clients that have signed up and are ready to go, it’s just a matter of flipping the switch at this point.
But I think, more importantly, it is the receptivity of these platforms and having private markets sit next to public markets for the first time in models where we had a lot of inquiry and a lot of interest among so many clients.
We think others obviously will follow; we see a lot of competitors talking about doing something similar for their own roadmaps. But we think this is going to be a huge [boost] for the models business and, more importantly, give access to private markets for the first time to investors who have been looking to add private markets to their portfolios.
WM: How does BlackRock choose who it partners with when it launches new models? What are your criteria for firms that you will work with?
JD: There are a couple of different answers to that question. One is we are partnering with most of the wealth managers that have a models platform and we have longstanding relationships with most of these wealth managers where we have other products on their platforms. It’s just a natural extension to the relationship, a natural extension to the partnership and their business and they are hoping to have more and more of their advisors use models and adapt the models practice.
From a wealthtech standpoint, like the partnership that we struck with GeoWealth, like the partnership that we struck with Vestmark, like the partnership we have with Envestnet, we do our due diligence on these platforms, making sure that they have a roadmap that we believe in, that is really using the client as the North Star and goes where the client is going. We make sure they have technology that we are confident in and technology roadmap that we have a belief in. Those are the partnerships we will continue to strike.
I think the background on that, though, is we want to give our clients choice. So, irrespective of which platforms they use, we want to make sure that we are offering our BlackRock models on those platforms, so they don’t have to choose a particular wealthtech firm to access BlackRock.
WM: How do you market your model portfolios financial to advisors?
JD: We really have a surround-sound marketing organization for our models business. Everything from how financial advisors should talk about models when they are speaking to clients, when they are moving clients from traditional portfolios to a managed model, we have ongoing marketing collateral, we have investment insights.
Any time we do a rebalancing, we have updates on why we made those changes and the market background on the economy that the advisors can ultimately use with their end clients. This really is a pillar-to-post service that we are providing.
When we are providing an investment solution, I think as important, if not more important, we are providing all of that education, and all of that market collateral, so it really is a full-service business model, almost a turn-key business model for our financial advisors who are choosing to have managed model practice with BlackRock.
WM: You’ve touched a bit on this at the beginning of our conversation, but in terms of your projections, how much should we expect to see the overall U.S. model portfolio market grow in the near term and also over the next decade?
JD: We estimate today, in pure managed models, it’s probably $4.5 trillion to $5 trillion. We think that number is going to double over the next handful of years. But maybe a couple of finer points.
That number could easily more than double as the industry and BlackRock add private markets to those models because the intersection of demand for private markets and the intersection of demand for managed model business will probably just accelerate as those things come together.
Number two, what advisors are finding that have adopted the managed models is they can scale their practices. They can spend more time with clients and more time with prospects and less time doing the whole administrative part of managing portfolios. Those advisors are growing faster and faster, and what we are seeing is that advisors that are growing the fastest are these advisors and then other advisors are seeing that, and they want to understand how they are doing it. So, it’s a little bit of success begets success. We think this is just going to continue to be a big part of the wealth ecosystem.
And what you will find in that is more and more personalization within these models, too. The ability to customize these models, we think will continue to be enhanced as technology continues to evolve, being able to have a higher level of personalization not dissimilar to how you personalize your Starbucks coffee or your Nike shoes. A lot of investors are going to want to have their own fingerprints on a lot of these models and be able to do it at scale. So, that’s going to continue to be a big part of the models business. As technology continues to evolve, this will continue to be a growing facet of the models industry.
WM: What other kinds of innovations do you think we might see in the model portfolio space?
JD: Maybe it isn’t an innovation, it has been around for some time, but certainly will continue to be at the center of a lot of model adoption is tax management and the ability to have more and more tax-efficient, tax-managed models. That’s the reason why you’ve seen direct indexing be such a big part of this evolution. It is why we bought [tax management company] Aperio a couple of years ago. It’s why after-tax returns have gone from a nice-to-have to an absolute necessity. It’s the number one conversation our advisors are having. So, you will see more of that tax management and tax efficiency across models platforms and you will see that technology continue to evolve and to become more and more prevalent in the models business.
WM: What do you think separates the most successful model portfolios from the rest?
JD: Maybe three or four things. One, performance is absolutely critical. And that’s a table stake—you need to have well-performing models, but is not the only thing. Number two is having that surround sound and surround education. It’s just not a product solution; this is a practice management solution. To be successful, you can’t just rely on a well-performing product. You need to have great marketing, so the financial advisor can use that with their clients and prospects; great education on the merits of having a managed model practice and making sure you are building those efficiencies of scale within the business; the brand is important—making sure that you have a great brand around these models.
All of those things combined and this is a choice—having a robust platform we think is incredibly important. It goes back to the earlier question of why BlackRock has so many models. It’s because advisors are looking for a certain level of choice, the ability to customize, and the ability to have more and more personalization. Advisors are looking for partners that have the ability to have the scale to have that choice that BlackRock is able to offer them, so we are not pointing them just to our single solution. We are really giving them the ability to provide different world-class solutions to their clients based on their risk tolerance and what outcomes they are trying to achieve.
One other point is that, given our acquisition of SpiderRock, most recently in March, the option overlay franchise platform once again gives us the ability to add more personalization around something that’s really important: more risk mitigation.
