- Investment management giant Fidelity is adding more fixed-income model portfolios to its menu of products available to financial advisers.
- It’s making that move against the backdrop of a fast-changing competitive landscape for brokerage, wealth management, and asset management.
- While Fidelity doesn’t charge advisory fees for the model portfolios, it charges investment management fees for the underlying funds. The portfolios’ average expense ratios range from 0.30% to 0.38%.
- The portfolios will be built using Fidelity’s own mutual funds and ETFs, the firm said, as well as third-party ETFs including BlackRock’s iShares. BlackRock is set to report fourth-quarter earnings on Tuesday.
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Investment-management giant Fidelity is adding more fixed-income model portfolios to its menu of products available to financial advisers.
It’s making that move against the backdrop of a fast-changing competitive landscape for brokerage, wealth management, and asset management. Fees for asset managers have been under increasingly intense pressure, and discount brokers raced to slash stock and ETF trading commissions to zero in the fall of 2019.
Model portfolios are built out of mutual funds and ETFs and can help replace portfolio construction via individual securities by financial advisers. Plus, they offer a prepackaged way to distribute asset managers’ products.
Fidelity, one of the biggest asset managers, on Tuesday detailed a new bond model portfolio collection. They’ll be built using Fidelity’s own mutual funds and ETFs, the firm said, as well as third-party funds — Fidelity mentioned BlackRock’s iShares in particular. (BlackRock, the world’s largest asset manager, is set to report fourth-quarter earnings on Tuesday.)
Meanwhile, discount brokers Charles Schwab and TD Ameritrade are set to combine later this year in a deal valued at about $26 billion. Both Schwab and TD Ameritrade have model portfolio platforms, and like Fidelity offer custody services for registered investment advisers. Schwab also has its own branded mutual funds and ETFs.
Model portfolios’ total market size has swelled to some $2.7 trillion in assets, representing 19% annual growth since 2016, according to an October report from Broadridge, the financial-technology firm that services global financial institutions. Broadridge expects model portfolio assets will more than double by 2023.
Though it’s growing and firms have estimated how many assets have flowed into the space, the model portfolios’ total market size is difficult to track.
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That’s in part because the portfolios can’t quite be compared against each other, or benchmarks, said Scott Smith, the director of the advice relationships practice at industry research firm Cerulli Associates.
Financial advisers are “trying to do seven jobs well,” Smith said in an interview, and using model portfolios can take away some of the investment selection work.
Fidelity’s model portfolios are available on so-called turnkey platforms for advisers, including its own offering.
Fidelity already offers bond model portfolios to the advisers it serves through its institutional asset management business. Where the new vehicles differ are through their strategies Fidelity says maximize clients’ total return when adjusted for risk.
For instance, one of the four new offerings is designed to expose investors to a diverse bond portfolio centered around investment-grade mutual funds and ETFs alongside a “limited” non-investment-grade allocation. While Fidelity doesn’t charge an advisory fees for the models, it charges investment management fees for the underlying funds.
The portfolios’ average expense ratios range from 0.30% to 0.38%.
BlackRock is also among the firms growing its footprint in the model portfolio space. It said in December that it was effectively trying to make clients’ model portfolio process smarter through a fintech partnership.
As competition ratchets up and feels fall fast in the ever-crowded wealth and asset management space, questions have cropped up around the relationships between asset managers and the brokerages and other platforms distributing their products — especially when there’s crossover between offerings.
One analyst asked BlackRock CEO Larry Fink on the firm’s third-quarter earnings call in October about distribution platform relationships in the wake of zero-commission trades becoming the norm.
“So let me just say one thing. Our relationship with Fidelity, as you kind of alluded to, is as strong as ever. Our relationship is way beyond ETFs. It’s about education. It’s about working with their platform,” Fink said on the call. “And so our relationship with Fidelity is unchanged, if that’s what you were trying to allude to, related to what we pay them and other things.”
Also in October, the CEO of asset manager Russell Investments, Michelle Seitz, said an interview with Business Insider that zero-commission trades could mean that firms like Russell may end up getting squeezed when commissions drop on the platforms that carry their investment products.
“Nothing is necessarily free,” Seitz said then. “The biggest element of all of these changes to the pricing structure to the end client, I believe, should be transparency — making sure that they understand how the entire ecosystem works.”
Bank of America said in October that it added 40 new third-party model portfolios for its own financial advisers to choose from, managed by firms including Natixis and JPMorgan, and available to Merrill Lynch Wealth Management clients. Bank of America first introduced model portfolios in 2017.
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