Model portfolios are ready-made fund combos delivered through financial advisers and brokerages to everyday investors.
The portfolios come in all shapes and sizes and are today surging in popularity as advisers seek quick ways to invest client money. A portfolio might use a classic investment formula of 60% in equity strategies and 40% in bond funds split between a dozen funds, for instance, or use algorithms to dynamically shift the funds it invests in as markets change.
Model portfolios take some of the human emotion out of investing.
Model portfolios are the latest example of the growing influence of bundled financial products on modern markets.
The models’ rise follows a decadelong transformation of Wall Street. Index funds that mirror markets and robo advisers that automate advice lowered the cost of investing. Human advisers were under pressure to provide cheaper services. Some moved to offering fee-based portfolios filled with low-cost funds—rather than giving priority products that would bring commissions.
Cheap exchange-traded funds provide abundant building blocks for models. Some asset managers jumped into models as a way to distribute their own funds in bulk.
After the 2008-09 financial crisis, brokerages tried to rein in advisers who took excessive risks. Encouraging them to use pre-vetted model portfolios was one way to curb rogue trades.
Broadridge expects U.S. model portfolio assets to more than double to $10 trillion by 2025.
Investor advocates warn that the multitrillion-dollar force comes with risks for consumers. Firms in the model-portfolio business face few regulations when it comes to reporting performance to potential clients. Some models contain unproven funds.
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