Displaying items by tag: model portfolios

Model portfolios have seen rapid adoption over the past decade as it allows advisors greater flexibility and resources to grow and manage their practices. In an article for Schroders, Gillian Hepburn discusses the growing demand for white labeling model portfolios that in some cases involves increased customization. 

For many advisors, the appeal of white labeling is to show their clients that they remain involved with the investment management process. However, there are some complications to white labeling and important considerations for advisors.

For one, it undermines the primary advantage of model portfolios which is to tap into the investment expertise and resources of asset managers so that advisors can spend more time with clients on financial planning. In the case of customized portfolios, advisors still have to ensure that portfolios are being rebalanced, results and trades are being reported, and regulations are followed.

Advisors should also think about what value is being generated by white labeling and whether clients are being charged extra fees. With increased regulations and the fiduciary rule, there needs to be a firm value proposition for clients to justify placing them in a white labeled model portfolio with higher fees.   

Finsum: Many advisors are looking to whitelabel model portfolios. However, this comes with certain considerations and may lead to additional complications. 

In an article for ETFTrends, Tidal Financial Group discussed the major challenge facing financial advisors. Clients want customized and personalized services, but growing the practice requires creating standardization of systems and processes and finding efficiencies. 

These conflicting demands tend to create a lot of stress for advisors and can limit their growth and effectiveness. Too much personalized service will impede your ability to attract new clients and grow the business while too many efficiencies will lead to unsatisfied clients and ultimately retention issues. 

Model portfolios can help advisors resolve this dilemma. They can help you offer more personalized services to clients without taxing an advisors’ time and resources. These models can be used for a variety of purposes such as reducing tax liabilities, values-based investing, more complex strategies, etc.

Instead of spending time on portfolio management, advisors can spend more time on marketing, client outreach, financial planning, etc. Advisors with a smaller practice may not appreciate the benefits of model portfolios until they get to a larger scale. Other benefits include simplifying client communication, leveraging research and education, and synergies between marketing and investing. 

Finsum: Model portfolios are one way for advisors to become more efficient while also creating a more personalized experience for their clients. 

While model portfolios are gaining in popularity, there are some notable detractors such as Lifeworks Advisors CEO Ron Bullis who criticized model portfolios for not providing enough customization for clients. His comments at the WealthStack Conference were covered by Patrick Donachie for WealthManagement. 

Specifically, he believes that the risk scores used by model portfolios are not effective indicators of the actual risk faced by clients which can vary by large amounts. He believes that the industry is falling short on meeting the needs of clients especially in a world of increasingly personalized services that are immediately available. 

Due to the ubiquitousness of smartphones and finance apps, the cost and inconvenience of switching advisors has dramatically declined. This is a major change from the previous decade. And, we saw a taste of this during the collapse of Silicon Valley Bank with $42 billion in customer deposits exiting the bank in days as rumors of a collapse spread. 

Advisors need to start thinking about this new reality as competition for clients could also increase. They need to clarify and understand what is unique about the services they are providing to their clients and need to proactively take steps to grow the relationship with clients. 

Finsum: With technology comes inevitable change, financial advisors need to prepare for a world where clients are much more proactive in switching firms due to digitalization.

Until the last couple of years, there were limited opportunities for investors to earn a decent income from thier portfolios. Now due to the Fed’s rate hikes, the situation is much different as there are plenty of options for investors. In AdvisorPerspectives, Mike Smith and Mary Erwin of Russell Investments detail some considerations to reduce risk while optimizing for yield. 

During the prior decade when low rates prevailed, many investors were forced to invest in riskier securities in order to generate a decent yield like international bonds, infrastructure bonds, and high-yield bonds. Now, investors can earn similar returns with securities that are much less riskier, but Smith and Erwin believe that investors should continue to have diversified exposure to the asset class given that inflation poses a major threat.

If inflation continues to climb, it reduces the value of these cash flows. Therefore, investors should ensure that their portfolios’ income will grow faster than inflation. Model portfolios can play an important role in this process as it can help build a diversified portfolio and offer exposure to a variety of asset classes with more potential for growth in their income streams.  

Finsum: A major challenge for income investors over the next decade is ensuring that inflation doesn’t eat into their portfolios’ income stream. 

In an article for ThinkAdvisor, Dinah Wisenberg Brin shared some tips from experienced financial advisors on the best way to integrate model portfolios into your practice. The category has seen rapid growth in recent years with nearly $400 billion in assets as of January 2023 which was up more than 20% over the previous year.

In many ways, model portfolios level the playing field between large and small firms. While some clients will always require a personal touch, model portfolios can be valuable in serving clients who have more typical goals and circumstances. Additionally, model portfolios allow advisors to focus more on enhancing the client experience and growing their business rather than managing investments. 

Another advantage is that they give smaller practices the ability to leverage tools and resources of major asset managers. These portfolios are also scalable and also leads to more optimal and efficient asset allocation. 

However, one clear disadvantage of model portfolios is that they cannot be customized especially in terms of allocations, time horizon, and risk tolerance. Therefore, they may not be appropriate for clients who have special circumstances or unique goals. 

Finsum: Model portfolios are a new innovation and are exploding in popularity. Find out if they are a good fit for your clients.