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Achieving Transparency & the Four Ps of Due Diligence, Part II

WisdomTree Investments
·7 mins read

This article was originally published on ETFTrends.com.

By Scott Welch, CIMA ®, Chief Investment Officer – Model, WisdomTree Investments

This article is relevant to financial professionals who are considering offering model portfolios to their clients. If you are an individual investor interested in WisdomTree ETF Model Portfolios, please inquire with your financial professional. Not all financial professionals have direct access to these model portfolios.

In Part 1 of this two-part blog series, we highlighted a recent Ignites post1 summarizing the findings of a comprehensive Morningstar survey2 on the explosive growth in model portfolio adoption by financial advisors and wealth managers. It highlighted some opportunities that can come from the increased use of models and some obstacles and hesitations to even greater adoption.

We’ve written before about the many opportunities for advisors that may come with model portfolios, so we will summarize them here:

  • A greater ability for advisors to focus on core competencies

  • More time for serving and finding clients

  • A more consistent investment experience for the end client

  • Greater scale and efficiency, all of which can help advisors “build their book” or increase their enterprise value

But what about the obstacles? The Ignites post summarizes them nicely, citing the Morningstar report: “There are no clear standards on how managers report track records and ongoing performance for their paper portfolios, according to a recent report from the Chicago-based fund tracker. This places the onus on advisors to step up their due diligence and rely less on track records and more on their understanding of the processes and people behind the models.”

To summarize, advisors need to focus on due diligence, and model providers need to focus on transparency.

In Part I of the series, we focused on due diligence. Now we turn our attention to transparency.

Transparency can mean different things to different advisors, but we believe common themes include the following:

  • Quality, comprehensiveness and accuracy of information

  • Timely delivery of information

  • Easy access to information

  • Responsiveness to questions about information

The bottom line is that if advisors plan to use model portfolios, they need to (1) understand how and why they are built and (2) be confident in discussing and explaining them to their end clients.

Here is a summary of how WisdomTree attempts to tackle the issue of transparency. Before we dive into specifics, a good starting point is a description of how we position ourselves and our Model Portfolios with the advisors who use them.

We emphasize that we are not trying to replace advisors in the investment management aspect of their practice. Rather, we encourage them to view us as an extension of and complement to what they are already doing.

In other words, view us as the addition of a global research team, whose sole purpose is to help advisors deliver institutional-quality portfolio management capabilities to their end clients. We find this creates a nice pathway for partnership and, therefore, transparency.

Now, onto the specifics.

Quality, Comprehensiveness and Accuracy of Information: All WisdomTree Model Portfolios are GIPS compliant. GIPS, or Global Investment Performance Standards, is essentially the industry gold standard for reporting performance.

To quote the GIPS website, “Compliance with the GIPS standards means adhering to all applicable requirements. … The GIPS standards must be applied with the goal of full disclosure and fair representation of investment performance. Meeting that goal will likely require more than compliance with the minimum requirements of the GIPS standards.”

Taking this one step further, all WisdomTree Model Portfolios have a live track record—we funded them at inception with our own capital—and all performances post the live track record of actual invested dollars. They are not simply paper models.

Timeliness of Information: The most recent asset allocations and performances of all WisdomTree Model Portfolios are available monthly on our website, including line-item positions and allocations. Every quarter, we provide fact sheets, commentaries and a summary of any allocation changes we made to the portfolios.

Ease of Access to Information: We make information about our portfolios available in various formats—our website, hard copy, Excel spreadsheets and more. Existing investors have this information “pushed” to them so that they receive it as soon as it is available (usually within a few days of quarter-end).

Responsiveness to Questions about Information: The research professionals at WisdomTree know that part of our explicit job description is to be responsive to investors’ questions. We work closely with our relationship management professionals to schedule conference calls, provide additional written information and analysis and, in general, be on call for inbound questions from our advisor clients. We know that they need thoughtful, accurate and timely responses from us so that they can, in turn, have those same discussions with their end clients.

Even before the Ignites article and Morningstar report, the WisdomTree DNA focused on transparency and responsiveness. It is key to the success of our clients and, therefore, of WisdomTree.

We know there remain obstacles to further adoption of model portfolio usage. But we believe that by listening to and working closely with advisors, we can build a solution that will overcome these obstacles.

1Source: Jackie Noblett, “Model Market’s Explosive Growth Muddied by Data Gaps,” Ignites, 8/13/20.
2Source: “2020 Model Portfolio Landscape,” Morningstar.

Important Risks Related to this Article

There are risks involved with investing, including possible loss of principal.

WisdomTree Model Portfolio information is designed to be used by financial advisors solely as an educational resource, along with other potential resources advisors may consider, in providing services to their end clients. WisdomTrees Model Portfolios and related content are for information only. They are not intended to provide, and should not be relied on, for tax, legal, accounting, investment or financial planning advice by WisdomTree, nor should any WisdomTree Model Portfolio information be considered or relied upon as investment advice or as a recommendation from WisdomTree, including regarding the use or suitability of any WisdomTree Model Portfolio, any particular security or any particular strategy. In providing WisdomTree Model Portfolio information, WisdomTree is not acting and has not agreed to act in an investment advisory, fiduciary or quasi-fiduciary capacity to any advisor or end client, and has no responsibility in connection therewith, and is not providing individualized investment advice to any advisor or end client, including based on or tailored to the circumstance of any advisor or end client. The Model Portfolio information is provided as is,” without warranty of any kind, express or implied. WisdomTree is not responsible for determining the securities to be purchased, held and/or sold for any advisor or end client accounts, nor is WisdomTree responsible for determining the suitability or appropriateness of a Model Portfolio or any securities included therein for any third party, including end clients. Advisors are solely responsible for making investment recommendations and/or decisions with respect to an end client. They should consider the end client’s financial circumstances, investment time frame, risk tolerance level and investment goals in determining the appropriateness of a particular investment or strategy, without input from WisdomTree. WisdomTree does not have investment discretion and does not place trade orders for any end client accounts. Information and other marketing materials provided to you by WisdomTree concerning a Model Portfolio—including allocations, performance and other characteristics—may not indicate an end clients actual experience from investing in one or more of the funds included in a Model Portfolio. Using an asset allocation strategy does not ensure a profit or protect against loss, and diversification does not eliminate the risk of experiencing investment losses. There is no assurance that investing in accordance with a Model Portfolios allocations will provide positive performance over any period. Any content or information included in or related to a WisdomTree Model Portfolio, including descriptions, allocations, data, fund details and disclosures, is subject to change and may not be altered by an advisor or other third party in any way.

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