Insights

Model Portfolios: The Core Foundation

  • Model Portfolios continue to gain popularity both locally and abroad. Early adopters such as the United States have already amassed US $6.8 trillion in model portfolio assets.1
  • One third of financial planners acknowledge it’s a core portfolio holding for their clients.2
  • This article highlights how model portfolios are used as a core allocation for many client portfolios  

The plethora of investment products coupled with baby boomers transitioning into retirement and the increase in intergenerational wealth transfer calls for expert guidance.

Guiding clients’ financial lives requires significant time and resources — from understanding their goals and risk tolerance to defining their investment objectives; assisting with tax, education and estate planning; and navigating a host of personal and family issues. As assets grow, finding the time to serve clients and attract new business can get even harder.

On average, advisers are spending more time on portfolio management (23.1%) than on either client-facing activities (14.7%) or prospecting new clients (11.3%).3 This does not reflect the priorities identified most often by advisers: deepening relationships with existing clients and acquiring more clients. A growing number of advisers are embracing model portfolios to improve operational efficiency and respond to client needs. They are selecting model portfolio solutions that fit their business and align with their investment management philosophy. Model portfolio users are getting more time back in their day to do what they do best, engage with their clients.

The notion of a core-satellite strategy is not a new one. But where do model portfolios fit? Are they a core component or should they be used as a satellite? Many model portfolio users have chosen to implement models as a core allocation in clients portfolio. This approach achieves a core-satellite strategy by holding the model portfolio as a “core” holding, which is a relatively diversified pool of investments, where additional investments can be added as a “satellite” positions around their core in the hopes of generating alpha. In Australia one third of financial advisers that have implemented a managed account as a core portfolio holding for their clients portfolio.2 In the United States, advisers often employ a core managed account in combination with individual stocks, exchange traded funds (ETFs) and managed funds to deliver a holistic portfolio to investors within lower wealth tiers.1 As the use of model portfolios increase, we see the typical client evolve. Whilst originally used for lower balanced clients, as the use of model portfolios increase so do the client types. Today, we see advisers allocate model portfolios to some of the most sophisticated investors as a core.

It’s no surprise that model portfolios are implemented as a core-satellite approach, enabling adviser to have “active” sleeves around a constructed portfolio core. We expect the growth of model portfolios to continue as these solutions are flexible and suited to a range of advisers and clients investment needs.

How to access a model portfolio?

Regardless of the approach, all model portfolios hold an advantage over traditional unitised investment vehicles because the individual assets are not collectivised but remain directly owned by the clients.

Speak with the State Street SPDR ETFs team to understand the best way to access a model portfolio for your business.