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Fidelity Investments.

Fidelity Joins Pursuit of Investors’ Money Through Model Portfolios

Like others, the asset manager sees opportunity in providing financial advisors with investment management solutions.

Fidelity Investments is joining a growing list of financial services firms pursuing investors’ money by offering model portfolios to financial advisors.

The firm, which has more than $7 trillion in assets under management, launched Fidelity Model Portfolios on Thursday with five target allocation models that are free for any advisor to use, not just those who custody client assets with Fidelity. The models include a mix of asset classes and risk profiles, and are constructed using both active and passive Fidelity mutual funds, which have underlying fees.

“This is something that, in some ways, we’ve been doing for years,” said Matt Goulet, a senior vice president at Fidelity Institutional Asset Management. Fidelity has long offered supporting tools and services focused on helping advisors allocate client assets. But it thinks model portfolios—out of the box allocation strategies—are “a new structure to deliver asset management”; less like a product and more like a service, Goulet said.

They aren’t the only ones. Other asset managers, including Vanguard and BlackRock, have also rolled out model portfolios for advisors. Exchange traded funds and passive investing have compressed asset management fees, and firms are looking for ways to engage advisors and, ultimately, attract investment dollars.

Ed Louis, a senior analyst at Cerulli Associates, a research and analytics firm focused on asset management and distribution, said asset managers he works with that don’t already offer model portfolios are bringing it up in meetings. He also said the large asset managers that can blend in-house active and passive strategies in their models are advantaged because not all companies can do that.

“The strategy has to either focus on core allocation pieces, for which you need massive scale, or niche strategies that demonstrate alpha,” said Lex Sokolin, the director of Global Fintech Strategy at Autonomous Research, a research firm for the financial sector. “By offering model portfolios, an asset manager moves up the value chain.”

It might seem like there are already too many model portfolios out there. Goulet said that Fidelity is in talks to add its model portfolios to Envestnet’s platform which has thousands of investment products. But there is still much opportunity for model builders, according to Louis.

A survey conducted in May by FUSE Research and showed that 81 percent of advisors across different types of firms already use some form of model to create client portfolios, and their use is proliferating.  

Investment management in increasingly commoditized and advisors are spending more time adding value for clients in other ways, like financial planning. But they still need to deliver quality investment management.

As a result, demand for model portfolios has been rising and observers say it’s especially prevalent with independent advisors who don’t typically have the tools and support of advisors employed by the largest brokerages. Those advisors in particular are looking to asset managers and other financial services firms offering model portfolios free of charge, knowing its a doorway to the assets to which advisors are the gatekeepers.

Model portfolios might be time-saving, inexpensive ways for advisors to gain access to institutional investment management, but Adam Grealish, a senior quantitative researcher at Betterment, said they need to be leery.

“The reason these fund companies are offering them is as a distribution channel,” Grealish said. “That’s certainly the motivation to basically give out this additional intellectual property.”

Starting with model portfolios that use only in-house funds is consistent with what others companies have done, and using investment products from other companies is “not something we’re opposed to by any stretch,” Goulet said. Betterment started with its own portfolio strategies and has also added a Goldman Sachs Smart Beta and a BlackRock Target Income strategy to its platform.

Fidelity has plans to roll out more portfolios this fall.

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