Model Portfolios: A Path to Optimization and Scalable Growth

Centralized portfolio management options are integral to scaling advisory practices. By taking advantage of model portfolios — asset allocation strategies aimed at providing a full or complementary portfolio solution comprised of several investment strategy components, including ETFs and/or mutual funds —advisors are able to spend more time on client-facing activities, which is highly correlated to increased client satisfaction and wallet-share growth.¹

Although many advisors still believe that portfolio management is at the heart of their value proposition, individual investors are increasingly realizing the value of specialized expertise. Offering comprehensive advice requires that advisors maintain a level of knowledge across multiple topics, thereby limiting the time they can devote to portfolio activities.

Advisors currently spend 23% of their time on portfolio management, while only spending 15% on client-facing activities and 11% on prospecting for new clients.² This presents advisors with a disconnect to their business goals since client-facing activities and prospecting for new clients are regarded as some of the most important aspects of growing an advisory practice.³  Yet that time is limited if it is spent on portfolio management.

As advisors seek to address the challenges of aligning business goals with optimal time management, outsourcing portfolio management may be a solution. For many advisory teams, the introduction and wide-scale availability of outsourcing options have been instrumental in increasing their capacity to spend more quality time with clients, create investment process efficiencies, and grow the menu of services offered — ultimately achieving scale.

The model portfolio value chain

While outsourcing requires a certain amount of delegation, it doesn’t equate to a loss of control. Advisory practices maintain their rigorous process for selecting portfolios that reflect client goals and risk tolerances, using transparency into the strategy’s investment objectives and portfolio construction as part of their decision-making process. What’s more, customized solutions and third-party model portfolios are not mutually exclusive. Today’s model marketplaces are among the most flexible approaches for outsourcing implementation; advisors can take advantage of pre-existing models from providers yet maintain discretion for tailoring these models according to firm philosophy or specific client needs.

The abundance of model portfolio options gives advisors greater choice, but it also makes the selection process more challenging. To be effective, model portfolio due diligence must go beyond an evaluation of basic metrics, such as investment process, performance and price, and include a comprehensive review of provider infrastructure, expertise, and transparency.

Provider infrastructure

In a Greenwich Associate study examining ETF model portfolios, advisors reported that a lack of resources, limiting a provider’s ability to deliver on promises,⁴ was the most significant shortcoming for ETF model providers.

Given the wide range of options, advisors must carefully evaluate providers to determine if they have sufficient resources to meet expectations. This is particularly important when it comes to communication, risk management, legal, and compliance to ensure high-quality service and seamless execution as assets grow.

Experience and expertise

As the number of model portfolios increases, so does the variation among providers in terms of experience and expertise. There is not a single “best recipe” for constructing and managing efficient portfolios. However, the due diligence process for a practice should confirm that providers have sufficient depth of experience and investment capabilities within a reliable investment framework.

Advisors are not buying just a model portfolio solution but rather selecting a model partner who will continue to support the portfolio in the future. Do they have dedicated resources that can consistently deliver performance throughout market cycles? Do they rely on star performers or leverage diverse teams? Will their organizational culture continue to attract top talent? Is this demonstrated within the portfolio team, among the back-office support and across the firm? Asking specific and detailed questions will help to identify the providers that are most likely to be partners who will add value over the long term.

Transparency into the process

Transparency into the investment process is especially important when evaluating performance reporting and any potential conflicts of interest or revenue-sharing agreements across model portfolio providers.

Outsourcing supports a structured portfolio management framework. It can lead to more consistency in applying suitability standards to client recommendations. It helps to shoulder the burden of risk without sacrificing portfolio quality and allows the practice to continually seek out operational excellence.

If the practice doesn’t already have one, consider developing a standardized process for reviewing performance reports from all prospective providers or hiring a third-party expert to audit performance calculations and reports.

Strategy plus execution

Deciding to outsource is a big decision. Model portfolios may not be suitable for every client in every practice, but they can generate economies of scale and the capacity to help meet practice-wide goals. Reallocating resources toward activities that are more closely aligned with business goals can empower advisors to add more value. And due diligence to identify the right partner provider is critical in order to meet these goals and, just as importantly, to meet client goals.

Integrating model portfolios into the investment process can help advisors spend more time on those critical elements of business development and raise the bar on the client wealth management experience. To learn more about “why or why not?” in the decision to outsource, read our report, Model Portfolio Solutions and the Client Experience or visit our Models homepage.