Monitor Models from 3rd Party Investment Companies

What usually fits better: off the rack clothing or a tailored garment to your exact proportions? 

Asset Allocation Models From Investment Companies Are the “Off-the-Rack” of Models

As advisors, you wear so many hats in your firm, at times you may be so distracted that taking a pre-built model from a large investment company may seem like the easy and best route. For the most part you may be correct. The question is how can you truly know if the ETF model that you’ve provided is the best choice in every category of style? 

Fiduciary Responsibility 

You have the responsibility to now only work in the best interest of your client but to also articulate your process in an easy-to-follow manner. Many investment companies offer advisory solutions, for free. At the beginning this seems great. But the model recommendations from Company A will always have Company A funds in their models. So, is this a bait and switch? Sure, they give away a few freebie tools that you can use, and then, oh, by the way, take a look at our models that best fit your clients risk tolerance. This has gone on for years and in reality, the investment company is being paid through the ETF expense ratio, so my question is; are the tools really free? Have they put you in the best position to offer a conflict free level of advice? The investment companies don’t have to answer to you client, you do. 

How to Use a Repeatable Process to Monitor Models

Simply, load the model into our platform at PortfolioWise, and it will analyze the complex landscape of all the ETFs in the style category of each sleeve of your model.  You can cross reference by the attributes you wish. Often the tiebreaker is the expense ratio, and if that is the case, the next questions you’ll need to answer is, does the expense ratio really make a difference? Of course cost is always a factor, but the falling short of the desired outcome is a cost that no one wants to incur. 

A forward-looking rating, one that incorporates the underlying stocks in the equity portion of your models, is a very transparent way to make the choices obvious, and easy to understand for your client. 

I’ll use the WisdomTree Aggressive Model that I sourced from an internet search. The interesting part here is that WisdomTree does use funds from other investment companies, which shows forward thinking on their part and the need to incorporate funds that may be the best option for the allocation. 

This is a great lineup of ETFs, and really convenient to source. Here is how the aggressive model lined up in our system. I am immediately drawn to the ETF symbol DON – WisdomTree US MidCap Dividend Fund, since it happens to be the only fund that we rate Bearish. 

Also, there are 11 funds in this allocation that are rated Neutral. After a quick scan I noticed that the HiYield Fund symbol WHFY, is ranked 56 out of 76 funds in the space based on our rating. 

Using the ETF symbol DON, I created a screen from just inputting DON into our screener. I located CDC – the Victory Shares US Income Enhanced Volatility Fund. However, that is tilted toward the large-cap style. So if you can be flexible with cap exposure CDC represents a great alternative, lower expense, better performance and it expands your choices outside the pre-canned model that you chose. 

If you absolutely must stay in the Mid-Cap style, then JKI, The iShares Morningstar Mid-Cap Value ETF is another choice. It offers a lower expense ratio, good mid-cap exposure, high dividend and again, another fund family in the model other than the investment company that provided the allocation model to you directly. 

Similarly, WFHY, can be swapped for IGEB and you get a better rated ETF, lower expense, higher yield, and slightly more liquidity. This could be a better fit at a lower cost. 

Off the shelf models have a place, but maybe they are just the fabric you need to tailor to get a much better fit. 

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Pete Carmasino is Managing Director at PortfolioWise, an ETF ratings system powered by Chaikin Analytics. Pete has over 25 years in the capital markets industry. He previously ran his own RIA firm for several years where he created his own ETF model strategy. In prior roles, Pete was a High Net Worth Advisor and Institutional Sales Trader.

Follow Pete on Twitter @carmasino.

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