In an effort to offer their clients a consistent investment approach while at the same time gaining leverage in how they manage their business
(and hence potentially making their business more valuable
), many advisors have embraced the use of model portfolios
– which deliver the same asset allocation and investment products for a group of investors. Regardless whether the advisor chooses to use models developed and managed by third party strategists
, or create and manage their own models, models typically offer three key efficiency benefits:
- Investment research efficiency: the research conducted to construct the model is applied across multiple clients and accounts, subject to the advisor’s determination about appropriateness for the individual client
- Trading efficiency: changes to the model can filter down into each account enrolled in the model
- Service efficiency: the advisor can develop a single, consistent performance review for all accounts using the same model, as opposed to having to prepare performance reviews for each individual, customized portfolio
These efficiencies typically allow advisors to manage expenses by spending less time operating their business and instead spending more time with clients
and developing new client relationships.
Solutions for when traditional model portfolios aren’t suitable
But traditional “full-monty” model portfolios aren’t suitable for some clients – or for some advisors’ business models. For instance, some advisors
- choose to deploy models only for some of their clients (typically those who don't require a high level of customization) and create custom solutions for another set of clients (typically higher net worth clients)
- may wish to express different insights and views in client accounts, depending on the unique needs and situations of the investor.
But I would argue that even in these cases – even when some degree of customization is warranted or desired – model portfolios of a more focused nature nature that, first and foremost, align with clients’ investment objectives, also have the potential to offer advisors consistency
For example, an advisor may choose to use a model that is designed to address a specific, common desired outcome for many taxable investors – e.g. improved after-tax returns. Such a “focused” model
- may include three complementary asset class exposures: tax-managed U.S. large cap, tax-managed U.S. mid and small cap equities and municipal bonds.
- could be deployed as a portion of an investor’s taxable account, while the remaining balance of that account could be invested in diversifying asset classes, e.g., international equities, emerging markets, real estate, etc.
- could be used as the portfolio starting point, as appropriate, for all investors that have the goal of improved after-tax returns.
Unified Managed Account (UMA) platforms are making it increasingly easy for advisors
to deploy such combinations of focused models and more traditional models for a portion of their clients’ investment accounts, allowing advisors to
- build and save the focused models for use across multiple client accounts
- access pre-constructed focused models developed by home offices and 3rd parties for use as sleeves
- track performance of each focused model and its underlying components
The bottom line
Assuming that the products are appropriate for the client, leveraging traditional models and focused models created and managed by third parties either for an entire client’s account or as a complement for a portion of a client’s account may bring efficiency gains to advisory businesses. In particular when an advisor is able to use both types of models created by the same third-party manager for both scenarios. It would certainly simplify communication of the third-party manager’s investment approach and performance to clients. But regardless of how an advisor may choose to leverage models – whether of the traditional or focused variety – in their business, these solutions can help advisors gain efficiencies in investment research, trading costs and servicing requirements. This is the beauty of models.