Introducing Target Income Portfolios from BlackRock
Partnering with BlackRock, you and your clients can access an income portfolio strategy that aims to deliver cash income while preserving capital.
To help you better serve your clients with a preference for a relatively low risk investment strategy, Betterment for Advisors offers a Target Income portfolio strategy sourced from BlackRock.
If you’re familiar with BlackRock’s income bond ETFs, you know that the Target Income portfolio strategy is a diversified 100% bond basket that seeks to provide a steady stream of cash income while minimizing potential loss of capital or stock market volatility. In offering the BlackRock Target Income portfolios, we provide four target income levels to choose from, each with different expected levels of yield generation.
This portfolio strategy is available to Betterment’s retail customers in addition to Betterment for Advisors’ clients. An income portfolio strategy is part of Betterment’s objective for offering customers’ greater personalization to meet their needs and preferences. In order for some investors to use this new income portfolio strategy successfully, they may need guidance from an advisor who understands their situation, and in many cases, we expect the firms on the Betterment for Advisors platform to play that role. We are firm in our belief that offering personalized portfolio strategies like this one is a way to grow your business.
Keep reading to explore two scenarios where we see this portfolio being potentially useful for your clients.
Generating Retirement Income
As advisors know well, many retirees value stable income and principal preservation during the later stages of their lives. They also tend to hold most of their wealth in tax-advantaged accounts such as IRAs and 401(k)s. The Target Income portfolio strategy is one way to meet retirees’ preferences.
It’s important to note that any income-focused strategy will be inherently less tax-efficient than a strategy that balances income and growth because bond interest is taxed at a higher rate than long-term capital gains.
Relatively Low Risk Investment Alternative
In addition to the retirement use case, we believe the Target Income portfolio strategy could also be useful for clients who show considerable anxiety about the stock market. If your client strongly prefers not to invest in stocks, the Target Income portfolio strategy can be an effective, personalized approach. It’s one way to make sure their money doesn’t sit idly in cash without taking on more risk than they are comfortable with.
It’s worth noting that your clients will pay a higher expense ratio on the Target Income portfolio funds compared to funds invested in the Betterment Core portfolio. The Betterment Core portfolio strategy, which contains a mix of stocks and bonds, has asset-weighted expense ratios of only 0.05% - 0.13%, depending on the portfolio’s allocation. The BlackRock Target Income portfolio strategy, while still relatively lower cost, has slightly higher asset-weighted expense ratios of 0.13% - 0.24%, depending on the portfolio’s target income level.
Different Income Targets to Meet Clients’ Needs
As with the other portfolio strategies available to Betterment for Advisors, the Target Income portfolio strategy can adjust to your clients’ risk tolerance. The Target Income portfolio strategy includes four different income levels to choose from, each with different targeted levels of expected yield. This strategy is actively managed, so the exact allocations of the underlying bonds are subject to change approximately once per quarter (and up to 6 times per year depending on market volatility). With each rebalance, we allocate to the asset classes that are designed to help your clients maximize their income return while limiting overall volatility.
The Target income portfolio increases projected income by taking on more risk in two main ways:
Investing in longer-term bonds: Long-term bonds are more sensitive to changes in interest rates, and thus carry more risk. To compensate for this risk, long-term bonds generally pay more interest.
Investing in lower-quality bonds: When you lend money from less-established companies, the chances of the company defaulting and not paying you back are higher. To compensate for this risk, low quality bonds generally pay more interest. Higher yield target portfolios may have larger exposure to lower-quality bonds.
Whether you have a retiree who wants to focus on income rather than growth or a nervous investor who would feel better with bonds rather than stocks, we hope this portfolio offering will help every advisor further personalize their services and offer investors more added value.
You can explore the Target Income portfolio strategy by BlackRock alongside the other portfolio strategies within your advisor dashboard.