Earth to Advisors: Vanguard Expands Model Lineup

You don’t have to be Derek Zoolander to appreciate the power of models, even if they can’t invest in Blue Steel, Le Tigre, or Magnum. 

Model portfolios are en vogue among financial advisors, particularly as asset allocation is all but commoditized and the business has become more about client service than ever. There are already dizzying numbers offered by numerous asset managers, keen to pack their model portfolios with in-house exchange-traded funds and mutual funds. This week, Vanguard expanded its line of models to include fixed income, with a pair of “dynamic asset allocation” options — the Vanguard Fixed Income Risk Diversification and Vanguard Fixed Income Total Return portfolios. “Model portfolios empower financial advisors with streamlined investment manager research and ongoing portfolio construction and monitoring, so they can spend time on the things that really matter to their clients — like ensuring they’re meeting their investment goals,” Brent Beardsley, head of advisor solutions for Vanguard, said in a statement.

Models Help People

Vanguard’s Fixed Income Risk Diversification model is built exclusively with the company’s ETFs, while the Fixed Income Total Return model uses six ETFs and one high-yield corporate mutual fund. The two options have weighted average expense ratios of 0.05% and 0.08%, respectively. Other big asset managers, such as Fidelity and Capital Group, have also built out their model portfolio options this year. The developments come as advisors grow increasingly open to model portfolios, which are pitched as ways to help guide asset allocation and free up time to focus on client relationships and prospecting.

Data from Cerulli Associates show:

• Total assets in model portfolios are projected to hit $2.9 trillion by next year.
• Among firms that use models, 13% of client assets were taking advantage of them as of 2023.
• Just over a third of advisors who used models last year plan to increase usage over 12 months.

What’s Left to Ponder? “It is arguable that long-only investing in public markets has been ‘solved.’ It makes no sense to hire or spend hundreds of thousands on a CIO to build a standard portfolio,” said Alex Caswell, CEO of Wealth Script Advisors. “In the future, the ability to adjust and customize the models is going to be the big differentiator.”

Another advisor, John Bell, of Free State Financial Planning, said the profession is, and should be, moving away from simply managing money, particularly for standard allocations based on Modern Portfolio Theory. “I look for more unique strategies that will complement what I see as the standard 60/40 portfolio and its variants from 0/100 to 100/0. These could be alternative, inflation, bear market strategies, etc.”