It seems as though every wealthtech vendor and custodian has launched their own model marketplace. It’s gotten to the point where I’m expecting to see model offerings at the drive thru at Dunkin Donuts one day soon.
According to research from Cerulli, 80% of all financial advisors use some type of model portfolios in their practice. The pros and cons of model marketplaces were debated by a panel of industry heavyweights at the recent In|Vest NYC 2018 conference.
What is driving the explosion of model marketplaces?
There are around $2.7 trillion in assets held across all investment models, reported Hollie Fagan, Managing Director at BlackRock. The breakdown is as follows:
- Rep-as-PM – $2 trillion (74%)
- Asset manager models – $150 billion (5.5%)
- Home office models – $500 billion (18.5%)
The $2 trillion in Rep-as-PM assets are just one of the segments that model marketplaces are targeting. There is also the huge pool of assets controlled by turnkey asset management platforms (TAMPs), which is somewhere between $450 billion (Cerulli) and $2 trillion (Tiburon), depending on whose numbers you believe. (See 5 Retail Model Marketplaces Struggle for Advisor Assets)
Model marketplaces offer portfolios of ETFs, mutual funds or individual equities, without any additional services. They could be considered like vending machines for model portfolios. Put your money in the slot and your model comes out at the bottom.
These new marketplaces have been entirely enabled by technology, proposed Michael Kitces, Director of Wealth Management at Pinnacle Advisory. Control of investment management distribution channels has shifted away from traditional wealth management firms and over to technology companies, he explained.
What once was a closed system is now open free enterprise with direct exchanges of intellectual property and fees. The asset managers who used to sit in the middle have been pushed aside by new channels that have touch points directly with advisors.
What has also facilitated the growth of marketplaces is the rise of low fee and no fee ETF portfolios from behemoth asset managers such as Vanguard, State Street and BlackRock. Fagen pointed out that BlackRock is agnostic as to where their models are distributed, so they are happy to offer them to every marketplace provider. While there are some standalone marketplaces, most advisors will use the marketplace that they are exposed to via their technology platform or custodian, she stressed.
But can model marketplaces eat into TAMPs market share with lower prices and accessibility across many technology platforms?
What is their value?
How do model marketplaces fit into the investment management value chain? What advisor segments are most likely to use them and in what way? 
Model Marketplaces have become a “sea of sameness” with advisors just choosing brand names that they know, stated Kunal Kapoor, CEO of research giant Morningstar. Even so, they do enable advisors to demonstrate their value by showing they can help clients reach better outcomes, he added.
I generally agree with Kapoor here, especially when it comes to custodian marketplaces like TD Ameritrade. But some technology vendors are trying to differentiate by stocking their product shelves with models from smaller providers.
The Riskalyze Partner Store includes some of the big guns like BlackRock, American Funds and SEI, but also offers models from niche players such as AlphaDroid (momentum), Longboard (alternatives) and Swan Global (hedged equities). Orion Advisor Services allows peer-to-peer model sharing among advisors on their platform.
They are also a good way for advisors to dip their toe into the third party investment guidance pool, proposed Estee Jimerson, Head of Asset Manager Distribution for Envestnet. There is a huge population of Rep-as-PM advisors, but as they grow their assets, they reach a point where their efficiency drops, she explained. (See Envestnet Expands Their TAMP Empire with FolioDynamix Deal)
This is not necessarily the case for all advisors. Many find ways other than outsourcing to increase efficiency as their practices grow. Of course, Jimerson is employed by the largest TAMP in the space with over $140 billion in AUM. So, it is in her best interest to encourage advisors to hand over their investment management to them, so they can focus on client servicing, marketing and other tasks.
Model Marketplaces are good solutions for efficiency and reduced cost, but not so good for investor personalization, stated Morningstar’s Kapoor.
I think Kapoor is referring to client restrictions such as “don’t buy tobacco stocks” or “don’t buy any IBM because I’m sitting on a low cost basis position.” Most wealth management platforms allow the advisor to adjust external models, as needed. Most also support account restrictions that would block the purchase of certain securities.
Also, since the models coming through these online storefronts are mostly ETFs and mutual funds, I don’t see personalization as much of an issue. Advisors could always turn to ESG models for clients that have social requirements.
BlackRock’s Fagan, who is also Head of their RIA, Direct and Retail FIG Businesses, noted that advisors who outsource to external model providers can reduce their CFA staff. Most BlackRock models are used by IBD & RIA advisors, she reported.
Different from a TAMP?
Are Model Marketplaces and TAMPs opposite ends of the investing spectrum, complimentary tools or just steps down the same path toward fiduciary outsourcing? 
When compared to vending machine-style model marketplaces, TAMPs are much more like a delicatessen with a variety of product offerings from third party asset managers that can be run as separately managed accounts (SMAs) or unified managed accounts (UMAs) as well as ETF and mutual fund based models. TAMPs also provide extensive services such as support for proposals, custom asset allocations and even help with account transfer paperwork. Of course, this makes TAMPs much more expensive than model marketplaces. (See Can Client-Directed UMA’s Help Defend Against Robo-Advisors?)
Model Marketplaces are at the beginning of the advice continuum, noted Envestnet’s Jimerson. They require advisors to be the primary fiduciary versus a full-service TAMP that handles implementation, trading and other middle office processes.
Model Marketplaces are a waypoint rather than an endpoint for an advisor’s practice, explained Kitces. Full service TAMPs like Assetmark have to drive the conversation with advisors to steer them away from a model marketplace product. (See How RIA’s Can Survive the Wild West of Roboadvisor Technology – Kitces)
A typical conversation with advisors is often around their fees and how they can help bring costs down, extolled Natalie Wolfsen, Chief Solutions Officer at AssetMark, one of the largest TAMP players. The sticking point is usually around the due diligence component, since full service TAMPs offer a curated set of solutions, she noted.
Some advisors aren’t comfortable selecting solutions and managing. Smaller clients can manage more efficiently. MM require self-service manager selection and management.
Jimerson agreed with Kitces that marketplaces are more of an outsourcing waystation. Marketplaces enable advisors to bring professional asset management resources into their practice, without moving their entire book all at once. Outsourcing also allows advisors to be more holistic in their thinking and focus more on non-investment tasks such as financial planning and client service, she emphasized.
How are economics and cost structures being re-distributed?
Investment management is becoming commoditized, proposed BlackRock’s Fagen, and advisors want resources to help move up the value chain and justify their fees. This is true on a number of levels, from robo-advisors offering baskets of ETFs for 25 basis points to ETF distributors offering models for single digits with no manager fees.
Marketplaces are just another example of the reduced economics for asset managers, it is hard to make it work if you don’t have scale, observed Morningstar’s Kapoor. Advisors’ fees have stayed stable over time at the expense of asset manager fees, which have been forced lower, he noted. (See Think Outside the Box: 4 Strategies for Boosting Distribution Market Share)
Asset managers need scale, brand awareness and distribution capabilities in order to succeed in a model marketplace, noted Wolfsen. Assetmark certainly has scale now after passing the $50 billion mark with the purchase of a $5.7 billion RIA in August.
In 2012, BlackRock noticed the dual trends of acceleration of price compression and the general movement of advisors towards fee-based, Fagen described. This became the impetus for them to launch their model programs, which are available through a number of model marketplaces including those from vendors Orion Advisor and Riskalyze, she stated.
For advisors making the move from commission-based to fee-based business, model marketplaces can act as a kind of halfway house, Kapoor suggested.
Can Model Marketplaces Replace RPM?
A recent study showed that client portfolios have only 1/2 the standard deviation when using third party asset managers vs Rep-as-PM in model marketplaces, Jimerson claimed. There is also data that indicates that practice values increase when investment management has been outsourced. (See Advisor-Managed Portfolios Knocked Out by Home Office Performance)
The tracked returns always trail the published returns, Kapoor noted, and home offices are never happy with the performance of RPM portfolios. They’re not sure if the benefits are being captured or are stated clearly enough when accounts are opened. Are we sure that investors are getting a good deal?
RIA aggregators, which rely on M&A for a significant portion of their growth, are searching for consistency across investors, Wolfson observed. The marketplace orientation would be particularly appealing to them, she stated.
The challenge from a broker-dealer perspective, Wolson asked, is how to know if you have enough information about RPM advisors to ensure they are doing the right thing for their clients?
Model marketplaces could become the new mutual fund wrap program, Fagen predicted. We need to invest more in end investor-enabling technology and education to allow advisors to deliver simple investment combinations. The most successful BlackRock models are the ones that are simplest to explain to clients, she reported.
There’s not much difference in the amount of due diligence required between RPM and model marketplace portfolios, Jimerson observed. There’s less risk for advisors in full outsourcing and planning. We’re still in the early early days, with broker-dealers still sitting on tons of commission business which will eventually convert to RPM and finally to fully-outsourced, she predicted.
There’s too much focus on the distribution piece, Kapoor believes. Both smaller advisors and larger RIAs want an opportunity to break into the asset management business, and model marketplaces can enable this to happen at scale. The lines between advisors and asset managers will continue to blur as they both compete for ever smaller fees and there are new outlets for marketing and distributing investment strategies.
One Response
Really good post, thanks Craig!