How Advisors Are Tapping ETFs in Model Portfolios

Model portfolios using exchange-traded funds are becoming the new darlings of the financial advisory world.

According to Cerulli Associates, of the estimated $36 trillion allocated to model portfolios across all financial intermediary channels, 65%, or $23 trillion, is managed in house by firms building their own models, and there are multiple reasons why that trend will continue to gain momentum. “ETF models have become the backbone for the majority of retirement and taxable client accounts,” said Patrick Huey, owner and principal advisor at Victory Independent Planning, adding that they’re relatively cheap and diversified. Huey, who has been using ETF models in client portfolios for more than a decade, said they can also provide easy rebalancing, tax efficiency and be used in different life stages.

For financial advisors wearing multiple hats while trying to run a business, not to mention build a brand and solicit new clients, model portfolios are taking off. “Models encourage consistency, reducing the urge to time the market or chase whatever is hot,” Huey added. 

Get on the Scale

Whether building models in-house or tapping into the various forms of outsourcing, model portfolios come in many different shapes and sizes. But financial advisors using them typically cite the ability to scale the portfolio management process as a leading benefit. “The key here is that advisory firms are leveraging practice-level resources to build models,” said Brendan Powers, director and co-lead of the product development practice at Cerulli.

For those advisory firms not interested in managing their own models, Powers said the outsourcing options continue to expand to include broker-dealers, asset managers, turnkey asset management platforms and third-party strategists. Of the 35% of model portfolio assets under an outsourced umbrella, Cerulli identifies a breakdown of assets that are purely outsourced as well as assets that are outsourced but also modified by the advisor or client. And across all model portfolios, Powers said he sees an increased use of ETFs as the underlying investments.

“The basic tenets of the ETF vehicle are attractive to the end user, with equal to or lower cost than the cheapest mutual fund, but the real benefit is the tax efficiency of ETFs,” he said. While liquidity is often cited among the key benefits of ETFs over mutual funds, advisors say liquidity is less of a factor when it comes to the use of ETFs inside model portfolios that are generally designed for buy-and-hold investing.

Put in the Work

Samantha Mockford, associate wealth advisor at Citrine Capital, said her firm transitioned investments in the in-house model portfolios to ETFs from mutual funds following Charles Schwab’s acquisition of TD Ameritrade five years ago, which triggered transaction fees on non-Schwab mutual funds. “We build our portfolio models in house, custom-tailored to a client’s time horizon, risk tolerance and values,” she said. “We rework our models periodically as a response to research and clients’ needs; not as a reaction to news.”

Anshul Sharma, who joined Savvy Wealth in September as the advisory firm’s first-ever chief investment officer, says ETF model portfolios provide a “powerful tool” to advisors and clients. “ETF models make the most sense at the core of a portfolio, because they create a consistent, low-cost baseline, and advisors can build around that with satellite strategies, active managers, alternatives or tailored solutions such as direct indexing,” he said. “This core-satellite approach strikes the right balance between efficiency and personalization.”

According to Cerulli, among the firms providing outsourced model portfolios:

• More than eight in 10 offer a core equity model to help advisors manage securities. 
• Similarly, 78% offer a core fixed income model.

“The trend we see is toward hybrid platforms with advisors relying on ETF models for scale and consistency, while layering in tools for tax awareness, values-based preferences and balance-sheet complexity,” Sharma said. “To me, model portfolios don’t replace advisor judgment, they amplify it by providing a repeatable, high-quality baseline that advisors can tailor to each client.”

Hit the Target. For James Norris Eppes, founder of Eppes Wealth Management, designing model portfolios in house using ETFs has been the surest pathway to his target market. “I work primarily with young professionals, and I find that these clients almost exclusively prefer ETF models to mutual fund models,” he said. “These young, affluent clients expect to be able to log in to their accounts and see live price action.”

Michael Mandelos, head of wealth management products at Orion Advisor Solutions, said model portfolios are efficient tools for building scale in an advisory practice. “When using ETF models, the advisor can learn and tell the same investment message to their clients, which provides them with more time for prospecting and service,” he said. “In addition, the ETF models allow advisors to create a core part of their portfolio and build around it with satellite offerings through more niche mutual funds, ETFs or separately managed accounts.”

Financial advisors are essentially wasting their time if they’re trying to build client portfolios using the old-fashioned way of picking individual investments, according to Ron Piccinini, director of investment research at Amplify.

“My opinion is that unless a client has a concentrated portfolio due to restricted stock units, a portfolio should be built with ETFs,” he said. “It is statistically impossible to pick stocks successfully over long periods of time and beat a professionally constructed portfolio. Also, stocks go to zero; indexes do not.”

Put a Stamp on It. And for anyone who might think model portfolios reduce the financial advisor’s value, Jen Wing, chief investment officer and head of investment solutions at GeoWealth, said the opposite can be true. “The real differentiation comes when advisors put their own stamp on these models, whether by selecting strategies that align with client needs and themes or by building core and satellite structures that blend a diversified ETF core with satellite exposures from different managers inside a custom-managed account,” she said.

As Wing sees it, model portfolios are becoming the foundation of more sophisticated investment strategies that can include direct indexing and even less-liquid investment positions.

“This combination of scale and flexibility is redefining how advisors deliver value,” she said. “The surge in demand for custom ETF models makes it clear that personalization is no longer the future of model portfolios, it is the present.”