The Future of Investing: Bringing Transparency to Managed Strategies


On Tuesday, March 22, the Nasdaq Fund Network (NFN) hosted BlackRock to celebrate the launch of their Target Allocation ETF Models on the platform. As part of this celebration, NFN hosted a panel event for all in-person attendees. The following is a transcript of their discussion. 

BlackRock at MarketSite

From left to right: Steve Witthuhn, Head of Product Portfolio Solutions & Practice Management, U.S. Wealth Advisory, BlackRock; Eric Mueller, Director of Portfolio Strategy, BlackRock; Devin McCarthy, Managing Director, Nasdaq Fund Network; Ben Jones, Senior Director Product Management, Nasdaq Fund Network

Devin: The Nasdaq Fund Network is a central registration service here in the United States for 40 Act mutual funds to be able to have ticker symbols and publish that net asset value out to the street on a daily basis. And the big news that we’re doing here today is we’re beginning to register BlackRock’s target allocation ETF models to provide transparency for not only the advisers using these strategies but also for the investors that are in these strategies as well. Additionally, one last point is we are only going to be working with asset managers that are GIPS compliant. We are looking to really validate this asset class by only registering GIPS-compliant strategies. We’re going to get into some of that fun information here. I’m joined here by Steve Witthuhn, Managing Director at BlackRock, his colleague, Eric Mueller, Director of BlackRock, and Nasdaq’s own Ben Jones from the Nasdaq Fund Network. I’m going to start with my first question for Ben. Ben, what is Nasdaq’s history in the models business, and how is Nasdaq serving financial advisers and asset managers in this space?

Ben: Welcome, and I have to start with saying welcome to the home of innovation—the Nasdaq Stock Exchange. And how we have been helping advisors in the models space. I think it starts with going back 51 years ago, creating a transparent market, and distributing quotes across and outside of New York City to the rest of the world. And, of course, we evolved over the years. In the mid-80s, you saw the creation and foundation of the Nasdaq Fund Network back in 1984, I believe. And that created transparency for important investment vehicles—mutual funds—created ticker symbols and transparency with NAV. That helped advisors and led to the creation of models. And an important date that’s important to me as well is in 2015 Nasdaq acquired Dorsey Wright, and that’s now known as Nasdaq Dorsey Wright

Ben: Dorsey Wright, for those of you who are unfamiliar, is a technical analysis research shop that provides research to financial advisors. In 2002, Dorsey Wright created a suite of iShares models to help iShares roll out the sector products. Now, that’s part of Nasdaq’s DNA, delivering model-based solutions to financial advisors around the country—and that started in 2002. And, of course, now, with the dissemination of ticker symbols for models, that is another step in the evolution of how Nasdaq is helping advisors with model portfolios.

Devin: Thanks, Ben. So, Eric, we’re going to go over to you. Can you share with us the history of BlackRock’s models business and what BlackRock is doing to build better outcomes for advisors? 

Eric: Yes, absolutely. You know, models at BlackRock, I think, combine so much of what we as an organization take so much pride in—asset allocation, partnerships with financial advisors, risk management, and the iShares franchise. And we can package that together, really going back now almost a decade, starting with our core target allocation ETF strategies that you alluded to, and, over the last 10 years or so, have really evolved into a business that started with a handful of models as a new business. And today, over a thousand model portfolios at BlackRock and almost $100 billion in assets under management globally—much of that here in the U.S. The evolution and the history of that growth has really been one of the industry itself. The need for wealth managers and financial advisors, like many of you in the room, for consistency and reliability in investment strategies. The ability to deliver scale and efficiency to a wealth management practice. And a partnership with BlackRock well beyond the investment solutions themselves, and those are the types of things with the help of technology that we’ve really tried to focus on the life of the models business at BlackRock.

Devin: Awesome, thanks, Eric. One other question for you, Eric, before I go to Steve. What are some of the keys to building a successful investing experience for advisors? 

Eric: I mean, I think it all starts with trust. I think Ben, you said that as well. Part of that is you made the allusion to the GIPS-compliant performance and comparability of returns and really validating that. That’s a really key part of the overall value proposition. It’s all about trust in this industry and in this business of models; trust in the investment solutions and the investment process, from the BlackRock perspective. But also trust in the user experience, like the partnership that these capabilities truly are between all of us here in this room, between BlackRock and many of you as advisers. 

Eric: And I think the key to success, I think of it in two ways. On the investment side, there is a scalability and efficiency that we’re trying to achieve. We’ve got to cater to an extraordinarily wide variety of investor needs that your clients have. But do that in a way that is scalable, delivers consistency, and delivers reliability. There’s a framework from an investment process perspective that you can trust and rely on. And I think that’s what we strive to achieve at BlackRock. 

Eric: From a user experience standpoint, the key to success is timeliness. It’s when we make changes to portfolios like we did just a week and a half ago. In that moment in time, you have that information at your fingertips. You know exactly what’s going on in your client accounts in a very open, transparent and concise way. The user experience of the technology that drives this support around these strategies is also really critical. And then I say the agility of the investment framework. You want to have a consistent set of principles, but you’ve got to be able to expand to different types of model offerings—whether that’s more tax efficiency or sustainability, the use of alternatives. There’s an ever-expanding list of investor needs in the industry, and you can think of this models business as a microcosm of the industry itself. 

Devin: Great, thank you. Steve, I’ve got a two-part question for you. What does the model portfolio of the future look like, first from an investment standpoint and second from an investor experience and advisor practice management standpoint? 

Steve: Sure, I will echo that it’s great to be here. Look, from an investment standpoint, I’ll pick up where Eric left off. Let’s first consider where models are predominantly used today. And that’s primarily in smaller accounts we find and for core asset allocation exposures. The target-on model is great for that. I think that’s a great use case, but there are obviously a lot of investor and advisor use cases that aren’t necessarily met by that. And I think that’s where we’re going to start to see the investments focus go from here. So, in a couple of areas—Eric mentioned alternatives—obviously, bringing models to ultra-high-net-worth investors is a foundational point. It means bringing some of the vehicles and the wrappers into those models that they have been used to using. So, we’re working on unlocking separate accounts as a predicate to models, particularly customizable or personalized separate accounts. The more that alternative strategies are available on the UMA platforms, where models are consumed, like accredited investor strategies, I think you’ll see those to be a bigger part of the models of the future. And again, that is to bring models more and more as a baseline for ultra-high-net-worth investors. 

Steve: I think the second area is multi-manager models. We welcome any model consumption of all BlackRock products, but we understand that you all, in many cases, would like to use other managers as part of your models, as well. So, I think you’re going to see more development around multi-manager offerings going forward as well. 

Steve: And the third is more outcome-oriented or targeted exposures. If you look at the multi-asset mutual fund space, something like 30 percent of multi-asset mutual fund assets are income-oriented funds. Ten percent of the model assets that we see are income-oriented models. So, I think you may see more use of income as an outcome model, more satellite exposure, and models for international exposure for thematic trend exposures. I think you’ll see more of that as well. And then Eric mentioned values-lined investing. We have ESG models—you can personalize the equity sleeve within a model. You can see models used to reflect the values orientation of an advisor or an investor. That’s part one. 

Steve: From an experience standpoint, let’s start with where we’re at today. Five years ago, I think our conversations around models were more philosophical. Here are the benefits of the models-based practice. You know, getting advisers to consider do you really want to pm a portfolio manager’s client’s assets or do you want to focus more on client development, client service and client acquisition. A lot of advisers over that philosophical hurdle, so the next hurdle was, I would say, experiential. It wasn’t that long ago that a fact sheet or a piece of collateral around a model was a pretty novel thing. We’ve worked to solve that piece of the experience. We’ve worked around things like podcasts, proposal tools, and analytical tools to help models turn into a practice experience. 

Steve: I think the next two experiential pieces are going to be around taxes and around customization. As you all know, it’s only part of the battle is to build the target model; you have to get the assets there. So, we’re seeing a lot more interest and focus on tax transition into models and the tax-efficient rebalancing and implementation of models. 

Steve: From a customization standpoint, a lot of advisers we found have had a bit of a barrier to using off-the-shelf models because they don’t want to necessarily pm all of their clients’ assets, but they do want to put their spin or their own tilt on a model. And so, the more that we can help unlock customization at scale for advisory practices, I think that will be another big piece of the models experience. 

Devin: Awesome. Eric, I’m going to come back to you for one other question before I go back to Ben. Given the breadth of tools available—SMAs, tax-managed equity—how is BlackRock taking these into account for future managed strategies? 

Eric: The key for us is how do we help our partners in the financial advisor community ensure that you can implement all of those different building blocks in a really efficient and scalable way, and how do you think about the sizing of those different types of building blocks into a portfolio alongside ETFs and mutual funds and other things as well. You know, we certainly see that in the alternatives conversation. The use of alternatives is the challenge is almost always, well, how much do I use? Where do I source it from? And when do I get in and out? Incorporating them as part of a model portfolio, I think, helps address each of those challenges. 

Eric: The same is true for an underlying SMA or a tax-managed portfolio, the sizing conversation, the role within the overall strategy just helps think more holistic for what’s in the best interest of the end investor. So, I think we’ve got to take all that into consideration when we consider those as part of our targeted weights in the next wave of model strategies. And then, the user experience of how you service those same building blocks and instruments is also going to be critical. 

Devin: Ben, I’m going to finish with you. Can you describe the importance of models being GIPS compliant and why that’s so important to us here at Nasdaq and, ultimately, BlackRock too? 

Ben: With the conversations about this initiative, I think two words that you’ve heard us talk about are transparency and trust. We have a requirement that strategies listed and that register on NFN are GIPS compliant. And that’s important because when you think about what GIPS provides, again, that was something introduced by the CFA back in the late 90s, is to standardize performance returns and create standardization for that, which would allow you to have the ability to compare similar strategies—you know, like for like. 

Ben: By having GIPS-compliant strategies listed and registered on NFN, you have the ability now to compare returns and have that trust and, more importantly, transparency. Part of this goal is to allow advisors to start analyzing and studying and determining which strategies are right for them and their clients. In order to do that, you have to have trust—and that starts with GIPS compliance. So, we’re making that a requirement. And I think the important thing about that is if you look at a lot of the GIPS rules—they have a fantastic handbook—these are standards that also evolve over time. The models that were constructed in 2002 and have been delivered to advisors via different websites versus the models that are being delivered today on the different tamps, or different custodians with different vehicles and asset classes, it’s very different. The key is that GIPS evolves over time to make sure that it keeps up with the time, keeps up the standards, and keeps up with the way the industry is evolving. So, I think having that stamp of approval with the strategies that register and the firms that register is very important for this initiative. 

Devin: Does anyone have any questions, or would anyone here like to add anything else about what we’re doing today as it relates to the model portfolios?

Question from Audience: As you look at your clients existing portfolios, the new allocations that will be coming down the road, the additional alternatives, can you transition from an existing model portfolio into these new strategies in a more tax-efficient way or start from scratch?

Steve: I think once the assets are within whatever platforms are housing the model, the UMA platform. There is no repapering required; you just change the target allocation of that portfolio. To the extent that the assets have already been transitioned to that account in a tax-efficient way or are being managed tax-efficiently, it becomes easier to then transition to that target portfolio. This is why we’re seeing disproportionate usage of models still in IRAs because that sort of tax drag is not an issue. With tax transition technology, you should be able to take that starting portfolio, even if it’s in an existing model, and then to a tax budget and start tracking your constraints. Start to move that into a different target portfolio that you choose. 

Question from Audience: Is BlackRock going to be involved in the tax transition or is this through other platforms?

Steve: We’ve partnered with a third-party technology firm called 55ip that makes its services available on certain platforms. We expect there will be other platforms that make this available, both from asset managers, third-party technology firms and the platforms themselves. I think honestly, over the next few years, it’s going to be pretty much table stakes to run a model platform is you have to not only manage the assets in a tax-efficient way but help advisers and investors transition to them tax efficiently. 

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