The emergence of free asset allocation models, subsidized by expense ratios of proprietary funds, are threatening to disrupt third-party strategists, according to a report from financial research firm Cerulli Associates.

Tom O’Shea, Director at Cerulli.

ETF and mutual fund providers have traditionally left the role of asset allocation models and fund selection to third parties; however, there is a growing trend in the US of asset managers beginning to offer model portfolios without explicit strategist fees.

Cerulli’s research points to nearly one-third (30%) of executives at asset management firms indicating they will offer asset allocation model portfolios for free.

This movement has the potential to disrupt the business of third-party strategists (investment advisers and discretionary fund managers) who typically charge 15 to 25 basis points for their asset allocation models.

“Related to the rise of ‘free’ strategists is the emergence of asset allocation model marketplaces,” explains Tom O’Shea, Director at Cerulli. “These allow allocation strategists a way to distribute their models to advisors outside of turnkey asset management providers and managed account sponsors.”

O’Shea believes these free portfolios will grow in popularity with advisors coming under increasing pressure from clients to produce suitable after-fee returns.

“As clients become more sensitive to the total cost of a portfolio, advisors are searching for ways to reduce the component costs of owning a managed account without jeopardizing their own advisory fee,” he said.

O’Shea notes, however, that there may be some resistance from clients themselves who may look suspiciously at strategies populated solely by funds created by the strategist.

Examples of ETF issuers who have rolled out model portfolios include BMO, Horizons, iShares, SPDR, Vanguard and WisdomTree.