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Model portfolios aren’t the controversial topic they once were among advisors. In fact, data suggest more advisors are deploying model portfolios.
Importantly, research confirms that model portfolios don’t chase clients away. Actually, various surveys indicate clients will stick with advisors deploying model portfolios and prospects are apt to give advisors their business when model portfolios are on the table.
Further enhancing the allure of model portfolios are at least two more points. First, model portfolios aren’t deterrent to investment outcomes. If anything, they can be additive to client outcomes. Second, by deploying model portfolios, advisors can leverage the time they previously allocated to investment management and monitoring to other revenue-building endeavors, not the least of which are adding new and retaining existing clients.
That’s not a stretch because data confirm advisors that aren’t using model portfolios are spending more time on portfolio management than they are on client-facing activities and working with prospects. Point is there’s merit in model portfolios, but advisors need to know where to start. Here are some pointers.
Establishing Model Portfolio Foundation
Advisors are already using exchange traded funds in a big way and that’s a good thing because many of the most cost-effective model portfolios are rooted in ETFs.
“ETF model portfolios each have unique characteristics and finding the right strategy can be a challenging task. When using models, remember that you are not just buying a portfolio — you are also selecting a provider to partner with over the long term. As a result, you may want to implement some best practices when conducting due diligence on models and their providers,” according to State Street Global Advisors (SSGA).
Here are a few places to start as proposed by SSGA, but I’m going to paraphrase those Colonial Penn commercials that are so ubiquitous on cable TV: consider the three P’s. Regarding model portfolios, the three P’s according to SSGA are process, price and performance.
Price is clearly understandable, but performance and process are as well. In this case, process simply means is the model portfolio construction easy to understand and can it be repeated? Obviously, the desired answers are “yes.” Performance is defined by satisfying advisors and client expectations as well as delivering relevant exposures.
Then there’s two R’s of reputation and resources. The former is straight-forward, so let’s focus on the latter.
“Does your provider allocate dedicated resources to manager and ETF research?,” notes SSGA. “How does the supporting infrastructure (compliance, legal, risk, etc.) factor into the process? Has the provider thoughtfully structured resources to more effectively meet client needs?”
Other Model Portfolio Considerations
Advisors evaluating model portfolio providers ought to consider a trio of other factors: communication, talent and transparency.
Talent and performance are linked and transparency should be implicit so that frees advisors up to focus on communication – something that may be overlooked when mulling model portfolios.
“Are product messages consistent across touch points?,” questions SSGA. “Is reporting timely, effective, and thorough? Does the provider actively engage in client education?”
Bottom line: there’s some legwork here, but it can help advisors identify the best model portfolio solutions for their practices.
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