As a companion to my post on Fidelity Model ETF Portfolios, I also found Blackrock’s version of their 60/40 Model ETF portfolio.
The was prompted by the fact that Blackrock recently announced that it was adding a 1-2% allocation to Bitcoin in their model ETF portfolios.
The world’s biggest asset manager is finally allowing Bitcoin into its $150 billion model-portfolio universe.
BlackRock Inc. is adding a 1% to 2% allocation to the $48 billion iShares Bitcoin Trust ETF (ticker IBIT) in its target allocation portfolios that allow for alternatives, according to an investment outlook viewed by Bloomberg.
Of course, this coincided with the fact that last year they finally launched their own Bitcoin ETF, the iShares Bitcoin Trust ETF (ticker IBIT). That made me wonder, what exactly does Blackrock put into these model portfolio that are meant for advisors? The model portfolio below does not have the Bitcoin ETF added yet:
As with the Fidelity model portfolio, and probably all model portfolios meant for advisors, there is the appearance of technical complexity, with a lot of tiny allocations to ETFs to bump the total number involved to 18 different ETFs and cash (and possibly the new Bitcoin ETF as well). 1% to the iShares US Infrastructure ETF? 1% to iShares J.P. Morgan USD Emerging Markets Bond ETF? 1% to iShares Gold Trust?
However, what surprised me the most was hidden in their performance stats at the bottom. With a relatively low net weighted expense ratio of 0.16%, their gross overall performance (before all fees) was pretty good and hugged the benchmark indexes very closely. However, they had to disclose that their NET historical performance (what clients actually got) was a lot lower… why was it so much lower? Because their managed portfolio apparently comes with a 3% annual fee, charged quarterly!!!
Tucked deep at the bottom:
Net composite returns reflect the deduction of an annual fee of 3.00% typically deducted quarterly. Due to the compounding effect of these fees, annual net composite returns may be lower than stated gross returns less stated annual fee.
So you put your Managed Portfolio clients in a low-cost ETF portfolio, and then add a 3% annual fee on top. Wow, that’s… wow. I have trouble even believing it. I must be reading this wrong.
Another interesting note is that Vanguard’s new CEO, Salim Ramji, was the former global head of iShares and index investments at BlackRock and thus very involved in their push into model ETF portfolios and probably had a big hand in designing them. Will he adjust Vanguard’s suggested portfolios in a similar manner?
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Hi Jonathan. So are AOA, AOR, and AOM also adding Bitcoin?
I don’t think so; if they do they’d have to make a change to their prospectus.
Got it. Thanks Jonathan!
3% charged quarterly. My oh my. I wonder what the cumulative effect of that is on the amount that someone needs to invest to reach a typical retirement balance (e.g., over the course of your 50 working years, you need to save $XX more to compensate for the fees taken by your advisor).
I’m wondering if the 3% annual rate fee deducted quarterly is actually paid to the advisor, and this is essentially a “loaded” fund. If so, then Blackrock is just a conduit for the advisor’s compensation/commission. Loaded funds are a common way for advisors to be compensated in a manner that is not very visible to the client (A-shares, B-shares, etc.). Some people paying fees this way actually think that their advisor doesn’t charge them anything and provides their services for free.
This fund is a prime example of the hocus-pocus that some advisors (typically the commission-based types) like to sell to clients — that complexity with all these 18 investment categories makes it better, and that’s why the client “needs” an advisor. This is the fake “value-add” that they are selling, along with the guise of “this is an exclusive/premium thing not available to people who don’t use an advisor.” It’s just smoke and mirrors with a high cost. Buyer beware.
Generally, the 3% fee is paid to the FIRM, and distributed out to the firm itself (revenue) provider (platform fee?) and gross production to the advisor. This is not set in stone; the arrangement could be different in reality.
The underlying premise is that small accounts (USD 25K – 100K) get drained fairly quickly.
In some cases, advisors will discount as they know there is competition (Morgan Stanley, Merrill Lynch, etc.).
And then there is the tiered model – discount grows as asset base does.