When using model portfolios, keeping it simple often drives the best outcomes, said the speakers at Inside ETFs+, part of Wealth Management EDGE at The Diplomat Beach Resort in Hollywood Beach, Fla.
Advisor adoption of actively managed portfolios will continue to grow for some time because the products simplify advisors’ lives, noted John Davi, CEO and founder of Astoria Portfolio Advisors. Advisors are using managed portfolios for a variety of functions, only some of which involve achieving higher returns. For many, it’s a way to safeguard against surprises. Using model portfolios also makes it easier to focus on achieving clients’ insurance and tax planning objectives while streamlining the process for advisors and ensuring succession planning, he said.
Darren Hinshaw, director of research with NBC Securities, added that model portfolios allow advisors to build core holdings for clients while leaving enough room for customization.
“You are talking about the serious money being managed in a proper, consistent way, and that really will help keep clients up in down markets,” said Hinshaw.
Deborah Furh, founder and managing partner of ETFGI, noted that 61% of active funds failed to beat the S&P 500 on a one-year basis. On a five-year basis, that number reached 83%. Under those conditions, spending energy on asset allocation with a professional manager is more efficient than trying to pick that one fund that will outperform, she said. And that’s made much easier with current technologies.
So, how should advisors allocate their clients’ money? Davi recommends spreading allocations between U.S. and emerging markets for diversification. He mentioned that from 2000 to 2010, both the S&P 500 and Nasdaq were down by double digits while emerging markets climbed 160%. “These markets have value, and you should pair value with growth,” he said.
Hinshaw said advisors can add liquid alternatives to their model portfolios as long as they already have those core holdings in place. However, he recommended adding them only if the advisor saw value in a specific fund, not because it’s in vogue in the industry to talk about allocating a certain percentage of a client’s portfolio to alternatives. Over the long term, he said that alternative funds can become a drag because they tend to carry high fees and are often tax-inefficient. As a result, there has to be a well-thought-out reason for adding them.
All three panelists recommended including ETFs in portfolios because they tend to have low fees, are tax efficient and are easy to understand.
“Keep it simple,” said Furh. “You can get very fancy, but it doesn’t necessarily give you better returns.”