Discovering Which Clients Are Right for Model Portfolios

For some registered investment advisors, model portfolios are a source of debate. What’s not up for debate is the significant grown witnessed in this space, confirming adoption is increasing.

The movement to model portfolios is underway, indicating that reluctant advisors may want to consider the data. A year ago, advisors had directed approximately $350 billion in client assets to model portfolios – an impressive 22% increase over the trailing nine-month period. Over the next five years, that figure is expected to easily swell into the trillions.

Many advisors are already deploying model portfolios, whether it be of the mutual fund or exchange traded fund variety, in their practices. Model portfolios are a boon for advisors looking to streamline operations and spend more time building practices while focusing on other offerings, such as estate and tax planning and more.

With advances in technology, it’s likely more RIAs will gravitate toward model portfolios. Let’s dive into ideas for advisor looking to capitalize on the advantages of model portfolios.

Discovering Which Clients Are Right for Model Portfolios

Many advisors are apprehensive about model portfolios because they believe it’s an offering clients don’t want and going that way might chase off business. Data confirm that those aren’t accurate assertions. In fact, many clients love model portfolios.

Still, advisors should remember that for all the high points offered by model portfolios, some clients may need some extra TLC. As WisdomTree’s Ryan Krystopwicz notes, clients in the “Open Olivers” and “Backseat Barbaras” categories are among the existing clients already enjoying model portfolios that might be ready for more.

“Open Olivers represent not only an advisor’s most loyal clients but also those most open to risk. They are likely in their early to mid-40s, tend to have a household income of more than $200,000 per year and have more than $665,000 in investable assets. They are early adopters, are viewed as a valued resource to others and often recommend products and services to friends and family,” wrote Krytopowicz.

On the other hand, “Backseat Barabaras” (not necessarily women) are usually nearing or in retirement and trust advisors to do right by them. They’re usually more conservative investors, but have substantial assets. Obviously, “Open Olivers” and “Backseat Barbaras” are different groups, implying that model portfolio communication and messaging from advisors is key.

“Most investors equate an advisor understanding their financial needs and applying a model to a doctor conducting an assessment of their health—so this analogy can also be useful for advisors who are presenting third-party models to their clients,” adds Krystopowicz.

Accentuate the Positive

Interestingly, model portfolios have something in common with so much of what advisors discuss with clients. That is it pays to accentuate the positive.

Those highlights include advisors “leveraging the vast expertise and experience of a team that spends 100% of its time on asset allocation” and “the trusted financial information and extensive expertise, research and technology that goes into each model. Consider talking about the number of people on the team or highlighting the number of analysts, strategists and PhDs and/or other advanced degrees of people on the asset allocation team,” concludes Krystopowicz.

The point: Model portfolios contribute to more efficient practices, freeing advisors to grow the business. Plus, clients are increasingly fond of these products. They’re the future. What’s not to like?

Related: Examining the Importance of 401(K) Consistency