Wealth Management Invest: Model Portfolio Trends with Invesco’s Karl Desmond

Speaker A: Looking for fresh ideas to drive growth at your RIA? Join us at RIA Edge Orange County October 19th through the 21st where firm leaders will explore the strategies, technologies and insights shaping the future of advice. Register today@ria edgeorangecounty.com

Speaker B: hello and welcome back to the Wealth Management Invest podcast. I'm your host David Bodimer, Editorial director with Wealth Management. You can find us@wealth management.com if you are not familiar with our work. Um, and excited to have another conversation here with important uh, person in the industry Carl Desmond, who is a senior client portfolio manager at Invesco. Carl, welcome to the podcast.

Speaker A: Thank you. Thanks for having me David.

Speaker B: So we're going to talk a bit about model um, portfolios but before we kind of get into the questions I have, I just wanted to give you an opportunity to tell folks a little bit about yourself. And I'm sure I would assume a lot of most people have heard of Invesco, but if you could just talk a bit about where you sit within Invesco and um, how you liaise with the advisor world.

Speaker A: Yeah, absolutely. So um, yeah for those that don't know Invesco, uh, we are about at a 2.5 trillion in assets so um, a large asset manager global uh, footprint. Um, most of those assets are in the U.S. uh, some may know us for our ETF lineup. We're the fourth largest ETF provider uh, in the asset management industry. Uh, where I sit at the firm uh, is in our solutions and custom strategies group which is a recently renamed group, um, but really our multi asset team. So we're tasked with building multi asset portfolios for both institutional and financial uh, advisor clients. And I sit uh, on our model portfolios group. So my team uh, is interacting with financial advisors day in and day out, talking about the benefits of model portfolios, constructing model portfolios and really delivering uh, what we want to be a top notch client experience for the advisors that invest in our model portfolios.

Speaker B: So yeah, this is obviously something that's been really growing in the industry. I think the most recent stats that I saw from Broadridge, uh, put the overall projections that model portfolios overall growing to something like 18.6 trillion by 2030. I know from surveys and just other industry metrics that this is just a lot of movement of client assets into model portfolios. Um, but there are a lot of different flavors within that. So I'm not even sure where best to start here, but maybe just talk about um, a big picture view on how advisors are some of the ways advisors are actually using model portfolios right now to achieve um, the goals for their clients.

Speaker A: Yeah, absolutely. And I think it's important to talk first about why that growth and that projection is so high. And I think um, the one word that comes to mind, uh, is scalability for the financial advisor. So uh, as we know David, uh, financial advisors have a lot on their plate. They're not just doing investment management. And so uh, I think more and more advisors are realizing if they really want to grow their business, they can outsource or partner with firms like Invesco that are really waking up every day and thinking about asset allocation, manager research, portfolio construction, um, and that allows them then to spend more time with their current clients, finding new clients, financial planning, estate planning, taxes, the list goes on. Right. Of what a financial advisor is doing for their end clients. So that's getting to the crux of why we're seeing so much growth in the industry and at Invesco, um, and why the projections I think are so large. So I think when you think about flavors you mentioned, um, if I were to put two flavors out there, there would be the pre built, kind of turnkey model portfolios. And those are the portfolios that you see on Invesco's website as well as you know, other asset managers offer. They're up on a lot of the large platforms or tamps and available, you know, to the masses. Really the other flavor that we have seen a lot of growth from and has really kind of, I think um, turbocharged the interest in model portfolios is custom model portfolio. So this is the idea that an advisor or an advisor team or a home office can sit down with our group and really co develop the portfolios with us as well as you know we offer things like co branding, uh, marketing material and supporting documentation that comes with, you know, this experience. So the customization aspect of the model portfolios, the ability to allow the advisor to really have a seat at the table and allow us almost to be an extension of their team is, is where we're seeing a lot of interest and a lot of growth.

Speaker B: Yes, I want to talk about both of those. Maybe we could start with just like the pre built one. So um, you know, one question that comes to mind is like, as you're approaching building um, on a menu of these, how do you think about what, what you want to be doing? Is it like around different mixes of assets? Are they, are they organized by like strict asset type? Are they, are, is it about risk, uh, value or all of the above in terms of putting together this robust menu of options for folks to be picking from off the shelf.

Speaker A: Yeah, I think there's um, within the off the shelf pre built space there's really two flavors. So let's call them subflavors. Now there's the multi asset target risk. Those are kind of your core portfolios, your one stop shop, 60, 40, 80, 20, 20, 80. Right, those. And then within those you can have different flavors that we offer all ETF multi asset portfolios or uh, hybrid mutual fund ETF active and passive um, portfolios with and without alternatives. The other subflavor is we call completion portfolios. So some advisors do like uh, to take more of what we would call a sleeve based approach. So maybe they want you know, the US Equity model portfolio from Invesco, but maybe the fixed income portfolio from another asset manager. And so these completion portfolios are single asset class. I will say, I will say David, we haven't seen as much interest over the years in those completion portfolios. I think a lot of advisors, back to my earlier point, they're looking to save their time, they're looking to create capacity. And so the one stop shop multi asset target risk portfolios are really where we're seeing the most interest and the most assets.

Speaker B: Yeah, I mean um, that fits with generally what we understand about the financial advisor world, which is that they want to spend time talking with their clients and building relationships and doing financial planning and spending less time at this point in that um, maybe caricature of the old days of advisors who are the stock pickers at this point. We've got asset managers who can have a lot of experience and track record. And it makes, and to me it makes just a lot of sense that you would, you know, not necessarily like that, that you would want to outsource that and lean on expertise of firms like Invesco in built in and building and selecting these kind of uh, model portfolios.

Speaker A: Yeah, we consider, we use the term revenue generating activities. So if you look at the advisor, you know, what are revenue generating activities that they really want and should be focused on? And the portfolio management researching ETFs and funds and SMAs and private markets. It's becoming a more and more complex world here. And to build portfolios, robust portfolios, requires a lot of time and is that generating revenue for the advisor at the end of the day or are they better off kind of partnering with a firm like Invesco and then spending their time building their business in other ways? That's really getting to the crux of the growth that we're seeing.

Speaker B: And in terms of the pre built model portfolios that invest coffers, how many are there at this point?

Speaker A: Um, there's a lot. Uh, the data really in the model portfolio space is a little fuzzy. It's self reported. So when we look at things like ETFs and mutual funds, they're all registered, you can kind of get a count on things. Um, there's thousands if I'm going to put a rough number of model portfolios that you can see in a database like Morningstar. Um, so there's a lot to sift through. Uh, like there is in the single ticker, uh, world. Um, and so it's a very competitive space in the pre built um, which I think is another reason why. Right. I think a lot of advisors uh, use those pre built off the shelf portfolios and find um, comfort in that. But why we're seeing so much interest in the customization the custom model portfolios is because they can create something with us that looks different than, you know, what other advisors might have access to on these platforms. And so, uh, yeah, I would say thousands. David, there's, there's a lot of model uh, portfolios out there these days.

Speaker B: So pivoting to that custom question, because that is also a very hot button idea. And I know that, you know, there are a bunch of different use cases for why our advisors may want to do this in some cases I know that it could be that, you know, they, they like the overall model portfolio but maybe want to like just change out one fund because it's something that they've been invested in already. Um, or there could be you know, other, other reasons why they want to do something more, more um, more personalized for, for their firm. So can you walk me through a little bit about like how the, that process works? What some of the reasons um, are that advisors come and decide they want to do a custom approach and what some of, yes, some of the uh, ways that then those are then built and whether those are things that you start from scratch on or whether you actually are usually maybe starting from one of the pre builts and maybe just like iterating on it. Like you know I'm throwing a lot at you, but yeah, yeah, no, I

Speaker A: get, I get it. Um, so I would say one of the reasons I think we're um, seeing a lot of success in custom model portfolios as Invesco is, is we start from scratch. Um, we don't take the start with the pre Built and just make some tweaks. And here you go. Uh, we're truly customizing kind of from the bottom up, if you will. So that allows us to be more flexible, more customizable than I think a lot of um, other asset managers are today at least. So if I bucket your question, maybe thinking about two things that go into building and managing model portfolios. One is your asset allocation and then number two is your manager selection. And so if you think about asset allocation, what are some of the customizations that we are asked about? A lot. So I'll give you a couple examples. One is your US versus international exposure. So a lot really most if not all pre built model portfolios have Roughly, I'd say 30% international and emerging markets relative to your 70% US two years ago that was a hot button issue because we for 10 plus years, right, the international markets underperformed the US now that has since changed a bit the past year and a half or so. Um, but you know, as we, we've kind of uh, you know, been building out custom portfolios, we offer the ability to cap that exposure at different levels. Um, and so that's been something that I think has, has been very interesting to advisors that want to express a view, uh, or you know, their end clients. I hear this all the time. Their end clients are turning on their TVs and looking at the S and P, the NASDAQ and the Dow. Right. And so if your end clients are benchmarking to those indices, how much international do you want? Do we need to recreate a benchmark for your practice that will work better and suits your clients better. And so we never recommend, you know, going all in on any one asset class. That's where we kind of try to meet in the middle. Bring our best thinking to the table, but marry that with a philosophy and process that the advisor has. Um, so that's one example on the asset allocation side. Liquid alternatives or alternatives in general? Another one. Right. A lot of model portfolios that are pre built off the shelf don't have any um, I think like single digits, low single digits. If you look at it across the universe of model portfolios have any uh, let's say non stock, non bond allocation. And so whether it's liquid, semi, liquid, true private markets, um, there's that ability, right. And that question that continues to come up of inclusion of alternative asset classes on the manager selection side. Just to finish off here, that's where most of uh, the questions come. So what we see and continue to see is financial Advisors want to do more with less asset management partners. So they want to do more and partner with less asset managers. And so what we see is a request in the customization of let's make sure that we include their favorite one to four asset managers or even down to the ticker level. We have a really good experience with this ETF from that asset manager. We want to keep that in the portfolio because our clients are really happy. We're really happy with it. So on the manager selection side that's a lot of the customization is around making sure asset managers that have helped the advisor get to where they are today are still represented and benefiting from the move to these model portfolios and then even specific tickers that they're happy with. And then also this dovetails into tax. Taxes are a big topic. So when we're talking to advisors about non qualified assets and building non qualified tax aware portfolios, that's where those ticker mandates really matter. Right. We want to keep your large cap growth ticker. If it has a lot of embedded gains, let's keep that in the portfolio. So this transition to custom models from Invesco is seamless and as least disruptive as possible. Uh, is a popular request as well.

Speaker B: So yeah, the topic of alternatives was something that I did want to touch on. So you've mentioned it. Um, I mean I feel like we are seeing. I'm starting to get more press releases about um, model portfolios that flat out just include uh, alternatives or um, tamps, uh, and UMA providers saying that they are adding the ability to include alternatives. So it does seem like it's again it's permeating into this model portfolio space. Are there any particular challenges that come into play when you start to add those kind of assets into model portfolios?

Speaker A: Yeah, I think um, if you think about alternatives, right there's the liquid and then there's the illiquid side. So starting with the liquid, which is, you know, those are easier from more of an implementation standpoint as you go into like true private markets. That's the big kind of uh, you know, predicament. Let's say that the industry is all we're tackling along with you know the, the tech providers out there. But if you start with liquid, I think the challenges that I hear about are I have to explain all these holdings to my clients. And so if you have, you know, we like to use managed futures. We have the last couple years and they've, they've done well. You know, you fund it from fixed income it provides you know, good uh, negative correlation to your typical stocks and bonds. So it's a good story. But having to explain a uh, more complex alternative strategy to the end client I would say is one challenge. So I think there's a lot of education and um, you know, building confidence about those types of strategies. Even on the liquid side, that, that I think is a hurdle we're all helping uh, the advisors out with as you go into the more illiquid space. And that's where I think a lot of the press releases that you're uh, mentioning are coming from. I would say. I think there's a lot more buzz from my seat around those announcements. And uh, I don't think we've seen the flows necessarily yet. I think it's a similar dynamic. Uh, although the big difference there is the implementation. So with model portfolios they're designed, right, first and foremost to make the advisor's life easier. That's what we're trying to do here. That's why it's resonating. So when you start to bring in some of these strategies that uh, you can't get your money out, um, rebalancing is difficult. You start to erode the value proposition of model portfolios to begin with. And so there's a ton of work, including at Invesco, we're very focused right now on product development on the uh, illiquid and semi liquid side. So our teams are um, really focused on. We have a couple partners in bearings and lgt. You may have seen announcements there of launching uh, the right products in the right wrappers in that space. So that hopefully, you know, when we do get those products to market, and we do have some already, but we're really building out that capability. We can bring them into the model portfolios but in a way that makes you know, and continues to make the advisor's life easy. So that, that I think is the big hurdle is the implementation. Um, and I know us and a lot of the wealth, tech and tamps and whatnot are very focused on, you know, really cracking that nut, if you will.

Speaker B: Yeah, and it makes sense. I mean it makes sense to me also just from the way that you're talking about model portfolios in general, which is like this idea of okay, you know, having a simplified allocation that gets you a broad, um, that gets you uh, ah, a diverse portfolio. It gets you access to a bunch of different things. That also does seem like it flows nicely into the idea of alternatives too. It's just like if you're thinking about if that's something that the client is interested in and wants to have that 5% or 10% allocation to alternatives. If we can do this all in uh, a more simplified way, then that does seem like it would have some appeal. But I guess as we're seeing now with um, the BDCs and the semi liquid space in general, just question of the liquidity mismatch and gating and then people maybe not fully understanding all that. And so how does all that then work? I guess it's just like something that we're going to have to continue to work through.

Speaker A: Yeah, it's an education component as I said. And our team, uh, our multi asset team here, we've been building public private portfolios for institutional clients for a very long time. So uh, I say it's not easy, but the easy part is kind of done right, which is what types of strategies, doing the due diligence on the managers that are out there and then actually combining them with public assets that you can do and build a paper portfolio. But then as it translates to the advisor actually investing end client assets and rebalancing the portfolios and withdrawals and things like that, that's I think where the focus is. And also the education coming from institutional to the financial advisor community. Why, why does private equity make sense in a broader portfolio? Why does private credit make sense? And really educating them on these new asset classes is I think where we're going to be spending a lot of time in um, the coming years.

Speaker B: Yeah, it's interesting because I feel like this whole, this idea of this democratization uh, became a buzzword like maybe two or three years ago at this point, but still looking at the surveys that are coming out of the advisor world, um, yeah, there is still a big chunk of this space that's either just not, that hasn't dived into it hasn't really checked it out that much. So at some point I was just like, oh my God, we're still like, it feels like we've been talking about education for a while, but then actually when you look at the numbers it does speak to the fact that there is still more of this process that has to take place. And then beyond that, like you pointed out, just like the clients at the end, clients like understanding because they may just be hearing bits and pieces and seeing a random, you know, Bloomberg or Wall Street Journal headline and not following all the day to day. And like how do you kind of just bring them up to speed and get them comfortable because you know, as we know from endowments and institutions and uh, those kind of investors that private markets have been core to what they've done forever and have been a big part of delivering the returns for those kinds of investors. Another I'm going to circle back to something that you also pointed out earlier, which is this idea of multi manager model portfolios. Can you talk a bit about that?

Speaker A: Yeah, I think with multi manager model portfolios I would say those are table stakes today. If you look at the evolution of model portfolios go back 5, 10, 15 years, um, a lot of large asset managers got into this space. They build portfolios with just proprietary products. They had a lot of success, um, but as new entrants and I would consider us, we've been around in the model portfolio space for five, ten years. Um, but still relative to others a bit newer. We saw that and heard from advisors. We understand the value proposition of the model portfolios that free up our time, everything that we've covered already. But there's statement risk, right? There's statement risk if you have only one asset manager on the client's statement. And so what has happened in the industry is really the multi manager open architecture portfolios that use both proprietary, in our case Invesco products, but also external managers. Um, that has now become kind of the norm and we pride ourselves on kind of being uh, a first mover there. And when it comes to our custom model portfolios we have a manager research team that has broad coverage of obviously The Invesco products, ETFs, funds, SMAs, private markets, but also the external managers as well. And so we can kind of bring in uh, the best of Invesco and then you know, some of the best of other asset managers to build really robust portfolios that these advisors are very proud, uh, to put in front of their clients. Um, and that statement risk is really, uh, minimal if not, if none, um, in some cases.

Speaker B: And correct me if I'm wrong. So this basically then from an advisor perspective allows you to have a single point of contact through Invesco. Um, but the multiple portfolio they're buying has this by having a multi managed portfolio. So they have a simplified relationship but then they have the access to the best in class managers of a few different companies.

Speaker A: Exactly right, yeah. So, um, across the active passive spectrum, ETFs and funds are usually the vehicle of choice. Uh, the portfolios that we are building day in and day out for advisors, um, include both Invesco and we like to say the best of Invesco, uh, as well as um, external Managers that screen well both quantitatively and qualitatively as our manager research team does their due diligence. Um, which yeah, we call obviously from a performance standpoint. Right. That's what we're trying to deliver. Alpha, uh, having more of an open architecture, more options to choose from as you're building out your asset allocation, your model portfolio. Ultimately that should help, right, Performance. But there's another aspect of this which is we call conversational alpha. And that also comes through as you have a, uh, more diversified portfolio, not just across asset classes, but across asset managers. The conversations that the advisor can have with their end clients about the different holdings in the portfolio, the different asset managers that are represented. That conversational alpha is also being delivered, um, via some of the materials and support that we provide when advisors are partnering with us on these model portfolios.

Speaker B: In terms of the distribution side, um, we're talking about advisors in broad strokes. Um, are there any like, wrinkles in terms of like working with like a wirehouse advisor versus RaaS versus broker dealers?

Speaker A: I don't think there's wrinkles. Um, we, we have, we have model portfolios available at a few of the wirehouses. We have model uh, portfolios available at, you know, within the independent broker dealer channel, uh, as well as, you know, RIAs, I think, you know, with the RIA specifically and obviously we're seeing you know, a trend and have been for a while of the RIA space growing, um, you know, at a pretty rapid clip, more advisors going independent. Um, I think the interesting thing with RIAS that maybe isn't true for a wirehouse advisor is just the flexibility and optionality they have from a technology standpoint. And so when you think about model portfolios from Invesco, what the advisor, the RIA is doing is outsourcing or partnering with a firm like us on um, the investment decision making. But if you're an ria, you also can get access to a wealth tech platform that can also handle the trading, the tax transition, the ongoing tax management. And so the most efficient advisors that I've seen and I've worked with are both outsourcing and partnering with firms like Invesco on the model portfolios, but also outsourcing and partnering with a well tech provider on the trading and tax loss harvesting that really frees up their time. Right. And allows them to spend, you know, uh, you know, basically all of their time on some of those more revenue generating activities we talked about at the onset.

Speaker B: Right. So again there's that practice management benefit from doing this.

Speaker A: Yeah. And we, we have, um, Invesco has one of the largest, if not the largest Invesco, uh, Global Consulting Group is what we call it. So those are the, these are the business coaches that are out meeting with advisors across the country. And they don't pitch products. Right. They're really talking about practice management. Where can we find efficiencies? Based on how you're running your practice today, the model portfolio story really resonates there. Right? Because that team really uncovers, okay, you're spending a lot of your time here, but if you pulled that time and spent it over there by using model portfolios, look at how much more revenue would generate. Look at the benefits of model portfolios also include a lot of advisors, as you know, David, are aging, nearing retirement, starting to think about, okay, uh, how am I going to transition? How am I going to maybe sell my practice? Right. And when you have a more streamlined investment process with model portfolios allow you to do that, as opposed to a lot of advisors that come to us, have different portfolios for every single client they have, that might be hundreds of thousands of portfolios spread across their book. So we come in and help clean up, uh, that and streamline that process. That allows whether they're transitioning maybe to a younger advisor or selling their business, um, a much more, uh, interesting, I'd say, uh, conversation, uh, depending on which route they want to take, uh, for their business.

Speaker B: Right. That makes a lot of sense. So we've been going for a good chunk of time here and um, you know, I want to be conscious of your time. So. But before, before I let you go, um, I just want to do a couple of things. First is if you, if there's anything that, like, I didn't ask of either. I'll give you two things. One, if I, if there's anything I didn't ask about that you want to hand give to the audience, and secondly, any, uh, kind of like just last little takeaways that you have for them?

Speaker A: No, I think, I think we covered a lot of ground. I think if the advisors listening to the, the podcast, um, are struggling with their time and need, uh, ways to free up their time and spend more time with their clients. I really think the model portfolios and specifically the custom model portfolios that we offer here, uh, should help, um, and I would really, uh, encourage them to reach out to their Invesco representative or look at our website and um, and poke around and reach out to us. And we're here to help, uh, them scale their business and I assume there's

Speaker B: like a part on the site that is they could find. They look up Invesco model portfolios. It'll take them to a part of the site that's got all sorts of good information.

Speaker A: Exactly. Yep. Invesco model portfolios. You can find more information on our pre built portfolios as well as the custom model portfolio offering we covered today.

Speaker B: Great. Well, Carl, thank you for coming, uh, on the podcast and for answering my questions.

Speaker A: Yeah, thanks for having me, David. Appreciate it. All right, David, how can people get in touch with you if they have some more questions?

Speaker B: You can find me on LinkedIn. I try to post all of the episodes there. In addition to just coming to wealthmanagement.com and going to the investment section, you'll find all of the past episodes of the podcast there, as well as just our ongoing, you know, coverage that we do, the stories and Q&As and, um, other bits and pieces videos that we do to cover the investment world for, uh, financial advisors.

Speaker A: Okay, well, thank you to both of you and thank you for listening today. Please, like, follow and share this podcast with your friends. Until next time, I'm your producer, Wendy McConnell. Looking for fresh ideas to drive growth at your RIA? Join us at RIA Edge Orange County, October 19th through the 21st, where firm leaders will explore the strategies, technologies and insights shaping the future of advice. Register today at riaedgeorangecounty. Com.