In keeping with our goal of making financial service industry information available to you that individual investors were never meant to see, here’s a link to an interesting article: BlackRock Portfolios Work For Investors But Not Advisors (fa-mag.com) 

While the title is likely “right” regarding investment advisors, model portfolios offered by BlackRock and other big providers really don’t “work” best for investors.

Here’s Why and Why It May Be Important to You

The article points out, several troubling truths about how some investment advisors operate that you should know. First, arguing that greater use of model portfolios would be beneficial for investors, the author points out that: “Many advisers still put their clients’ money in overpriced mutual funds that pay the adviser a kickback, often unknown to the client. Of the roughly 24,000 open-end mutual funds in Morningstar’s database, nearly 11,000 charge a 12b-1 fee, a reference to the rule that allows the practice.” 

But while model portfolios may help individual investors avoid such undisclosed 12b-1 fees, there is an even greater problem. It’s the question of what value has the advisor actually added to justify the advisory fees you are paying (fees many times larger than any 12b-1 fee)? 

Saying the “quiet part” out loud, the author writes: “If advisers hand their clients’ money to models, it’ll be harder to justify a 1% fee. They will also no longer be able to assert, as many do, that their portfolios are custom-built for each client, a claim that already strains credulity . . . .” “Strains credulity” is simply a polite way of saying such claims by investment advisors about this are often simply untrue. 

Here's a true story that helps explain how investors are now too often paying significant investment advisory fees for a shockingly simple matching service that they themselves could do for virtually no cost. 

In asking the CEO of an investment advisory firm how his 140 advisors provide their advice, he informed me that they use Morningstar model portfolios. I then asked, how much do they cost, to which he replied, “45 bps” (i.e., 44/100ths of 1%).  My response was: “Really? Your advisors are willing to pay 45 bps to use Morningstar models?” “Oh no,” he replied, “they don’t pay it, the client does.”  “Then how much do you advisors charge,” I asked. “The usual 1%,” he replied. “So, your advisors are charging their clients a total fee of 1.45% for simply matching them to a model portfolio your advisors didn’t even create?” I asked in shock.  “Yes,” he replied, unashamedly.

Do you think this “service” would be reasonably worth a recurring charge of 1.45% of the total value your portfolio, each year?  Do you think any of their clients understood that was all they were getting?  Do you think that his is the only investment advisory firm in the country doing this? How about “NO” to all three. 

Unfortunately, this appears to be a growing trend and why not?  If advisors can get investors to pay so much for so little, adopting a business model like this seems pretty tempting, especially for lazy advisors.  If you are an individual investor and have an investment advisor, you should check to see if this is happening to you. If it is, you should demand a reduction in your investment advisory fee – a big one.

I mentioned above that you can perform this shockingly simply matching yourself at virtually no cost. How? 

All you need to do is type the following four words into your internet browser: “model investment portfolio examples” and hit enter. You will get to see the model portfolios of all of the big providers.  Take some time to review and read about them and then pick the one that you feel best matches your needs, goals, and preferences.  Next, write down the names of the asset classes (there will typically be about 6-8) and the percentage of your investment dollars that the model recommends be allocated to each.  The result? You will have matched yourself to a model portfolio appropriate for you, which you got to choose from multiple model portfolio providers (not simply the choices offered by only one – the one your advisor uses). And, most importantly, it cost you nothing to do so.

Next, you need to pick the mutual funds or ETFs for each of those asset classes. How can this be done? 

The key problem here that has led nearly all model portfolio providers to use ETFs (often their own) for the investments within the asset classes is the problem of complexity. There are so many choices as to make the comparative evaluation of choices and selecting from among them paralyzingly difficult, if not impossible.  This is one of the chief reasons advisors (and investors) often simply “give up” and move to ETF model portfolios . . . it’s certainly easier. But, very often, it’s not better. 

Rita℠ solves this problem by enabling you to objectively score and rank hundreds of mutual fund and ETF choices, using up to 24 separate performance parameters, in a manner specific to your own needs, goals, and preferences – all in mere moments.  What you’ll very often find, in using Rita℠, is that there are some ETFs that significantly outperform others (no need to default to a BlackRock model and be limited to only BlackRock ETFs) and there are often many mutual funds that significantly outperform the ETFs. 

With the Rita℠, you can comparatively evaluate all of the available mutual fund and ETF choices within the asset classes comprising the portfolio you’ve selected or created. Thus, you can ensure that the mutual funds or ETFs that you’ve selected have proven best, over time, at producing the investment performance you desire. That’s something no model portfolio provider (no matter how big or well known) can give you.

The writer finishes by again saying the quiet part out loud: “They (investors ) can easily manage their own money by investing in one or two of the smaller number of low-cost ETFs that track broad US or global stock and bond markets. These ETFs can be bought and sold commission free through any big brokerage.” Notice, he’s saying that to advisors, not to you. Do you think the industry would want you to know this?

Yes, you can “easily manage your own money,” but not necessarily in the way the writer describes.  There’s a much better way (described above), using Rita℠, which the author doesn’t yet know exists.