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Model portfolios have long been mainstream in the wealth management industry with more and more advisors waking up to the advantages of these tools, chief among them the point that model portfolios are client acquisition and retention tools.
By some estimates, nearly three-quarters of advisors deploy model portfolios in some form or fashion. That includes using model portfolios as the primary asset allocation tool or blending these portfolio with separately managed accounts (SMAs).
Now, it’s time for the next step in model portfolios’ evolution: increased levels of customization and personalization, which includes addressing where these products fall short. WisdomTree Director of Client Solutions Ryan Krystopowicz highlights taxes as an area where model portfolio providers can up their respective games, potentially helping advisors improve client satisfaction along the way.
“When advisors were asked where model portfolios fall short, the top response was limited tax awareness and after-tax optimization at 38%,” he notes. “Other common responses included the inability to tailor portfolios to specific client needs and difficulty differentiating the advisor’s value proposition, both around 31%.”
Clearing the Customization Hurdle
It’s widely known that today’s clients want more personalization, but on the surface, model portfolios may appear to run counter to that mission. In theory, model portfolios work on blanket approaches, but that’s not the reality. Hence, advisors have questions about to up the customization proposition.
“42% of advisors cited lack of customization as a key obstacle to broader model adoption,” observes Krystopowicz. “Another 37% pointed to the challenge of communicating portfolio changes and decisions to clients. 22% cited concern about losing a differentiated value proposition.”
That is to say there’s a “missing link”, but it’s not a holy grail. Rather, it’s easily attainable. It exists in the form of infrastructure, implying advisors need to be highly selective when selecting model portfolio partners. The right partner helps advisors enhance model portfolio personalization while limiting or eliminating downsides, such as tax drag.
“In practice, taxable accounts, cash flows, restrictions, transitions and rebalancing can create meaningful operational drag,” adds Krystopowicz. “Advisors do not just need a model; they need an implementation engine that helps make the model work across real client accounts.”
Why Customization Matters
Regarding why advisors need to convince clients that there is personalization in their model portfolio experience is easily explained. As noted above, clients are on board with model portfolios. In fact, they don’t just approve of this method of asset allocation. They embrace it.
WisdomTree research indicates 90% of clients of welcome advisors using model portfolios while 70% view these tools as upgrades and the same percentage believe model portfolios will generate better long-term returns.
“That is powerful because many advisors still worry that using third-party models may weaken their value proposition,” concludes Krsytopowicz. “The data suggests clients often see it differently. They view model portfolios as a form of leveraged expertise: their advisor combining personal knowledge of the client with the investment research, resources and portfolio management capabilities of an institutional asset manager.”
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