Fidelity Analyzed 4,000 Advisor Portfolios. A Huge Takeaway Has Little to Do With Allocations.

Wealth management portfolios are drifting in two directions. But something else caught the attention of one of the biggest asset managers.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

A group at Fidelity Investments dedicated to helping wealth managers analyze and improve client portfolios is observing material changes in the industry. Chief among them: financial advisors are dramatically more interested in seeking assistance when building portfolios.

Fidelity’s Portfolio Construction Solutions Team is a relatively small but busy group of about dozen people. Since it was created in 2013, the group has assessed more than 50,000 investment portfolios for 20,000 advisors working for about 1,000 different firms. Most of those advisors use the team’s Fidelity Portfolio Quick Check, a risk management tool that analyzes correlations between funds in portfolios and other risk/return factors, as well as other tools. Some advisors also solicit Fidelity’s team for more in-depth analysis and help shaping portfolios.

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Through the many assessments, Fidelity has observed several trends in the data it collects prior to engaging with advisors.

Research has shown that U.S. financial advisor portfolios have rampant home bias, and that continues to be the case. In 2020, domestic bias increased from 70% to 73% year-over-year, according to Fidelity. Fifty-seven percent of advisors also said they plan to increase allocation to U.S. equities.

Chasing the performance of growth stocks, advisor portfolios also remained overweight technology companies, which accounted for 23% of allocations last year. Advisors also dedicated a larger percentage of their fixed income allocations to investment grade securities; 76% in 2020, up from 72% in 2019.

The average portfolio had 13 holdings, six different asset managers and an underlying blended fees of 60 basis points.

Fidelity also found that markets in 2020 polarized some wealth managers; more advisors moved from moderate portfolios to either conservative (11% to 15%) or aggressive ones (13% to 15%). Those changes to allocations were already underway early last year, before Covid-19 began rapidly spreading in the U.S. and caused the fastest-ever bear market.

But those small percentage changes to allocations are “not that meaningful,” Matt Goulet, senior vice president of Portfolio Solutions at Fidelity Investments, told RIA Intel. Advisors are always making changes to client portfolios in response to what is happening in markets and the world.

What stood out to Goulet and his team in 2020 was the level of interest wealth managers had working with them. In 2020, Fidelity analyzed over 4,000 individual portfolios, up from 2,000 in 2018 and fewer in years prior.

Most advisory practices build and rely on their own custom portfolios, even though the vast majority of them are ill-equipped to do so, according to a recent report by Cerulli Associates. The Boston-based research and consulting firm estimates that only 7% of practices are capable of doing that effectively with the teams they have in place.

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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