How do model portfolios improve the client experience?

Curtis Congdon of XML Financial Group and Carin Pai of Fiduciary Trust International

Using model portfolios 'improves client outcomes when there are changes and market moves and rebalancing that need to be done,' an advisor says.

Managing investments can become a large part of a day’s work. Between meetings, marketing and figuring out best-in-class asset allocations, advisors can be hard-pressed to deal with the rest of their chores.

Model portfolios are an option that offers efficient diversification, transparency, and robust reporting. They also provide an opportunity for advisors to focus more on their clients.

Curtis Congdon, president at XML Financial Group, says advisors have a choice of building out their own model portfolios or using a third party’s. Advisory teams who build out their own models will be more popular, he said.

“They want to be able to tell their story through those holdings, but they don’t want to have to do that for each client,” Congdon says. “They can instead bring a lot of efficiency to the way that they invest their clients’ funds through their own internal models.”

One of the primary benefits for advisors using model portfolios is that their clients get the advisors’ best ideas implemented quickly and efficiently, Congdon says, which is necessary for advisors who are focusing on growing their business.

While model portfolios should only be used as a reference, says Carin Pai, head of portfolio management and equities at Fiduciary Trust International, an additional benefit is the many efficiencies that can be gained, like quick implementation and achieving consistency across portfolios. In addition, there are tools that deal with tax-loss harvesting.

“Tax-loss harvesting can be very beneficial for clients that are taxable because if we’re generating and taking profits, it is helpful to sell something with a loss to offset those gains or those profits to reduce the tax bill for the client,” Pai says.

However, a potential drawback could be that there are situations in which clients will want investments that aren’t part of the model.

“The advisor has to decide if they’re willing to accommodate that or not, and I think for the most part, clients follow their advisor’s lead,” Congdon says. “If the advisor believes in and is committed to their models or believes in and is committed to focusing on things that truly matter, then the clients will go along with that and ultimately thank the advisor.”

With advisors wearing many hats, from research to sales or client relationship management, it can be challenging to manage a book across a number of different clients who all have specific preferences and goals, says Timothy Chubb, executive vice president and chief investment officer at Girard Advisory Services.

Using model portfolios “is really your core and improves client outcomes when there are changes and market moves and rebalancing that need to be done,” he says. “Being able to do that really quickly is extremely important, and it also reduces risks for the organization.”

More often than not, advisors are working with rebalancing software, Chubb added, and if they’re not taking a model-based approach, it’s “extremely difficult to really leverage the full capabilities of that software as a firm.

“But having a model-based approach and utilizing that rebalancing software really allows for a consistent client experience across the board, and one that’s really scalable for the firm as well,” he said.

Eric Amzalag, owner and founder at Peak Financial Planning, said model portfolios can be a double-edged sword.

“Used well, if the advisor TRULY understands the model and can explain to the client why that model is appropriate and how it will serve the client’s personal needs, then it can be a great tool. It takes a complicated message and simplifies it in a digestible manner,” he wrote in an email.

On the negative side, one issue Amzalag says he’s seen with model portfolios is that they allow advisors to become lazy and fall out of touch with the “why” behind the model. “Because the advisor is not involved in the portfolio construction directly, they frequently have no idea what is in that portfolio, why it is constructed that way, and therefore default to simple heuristics such as asset allocation or age as the only data points that determine what model a client should be in.”

This can be a dangerous circumstance, Amzalag said, and “can actually create an even greater mismatch of expectations as the advisor may not be able to communicate clearly the actual attributes and rationale behind the model, creating additional anxiety on behalf of the client.”

Ultimately, what model portfolios enable advisors to do is bring added value to the client relationship, allowing them to spend more time discussing their clients’ overall financial picture with them, Pai said. “Rather than taking a lot of time implementing the portfolio and certain investment changes, it allows the advisor to really spend time building the client relationship, doing value added things like having a conversation with a client about their interests, about their objectives and really focus more on the bigger picture.”