Why advisors are turning to customized portfolios

Model portfolios are taking a hit when it comes to what advisors are offering clients. Findings from InspereX’s Pulse survey found that 72 percent of advisors said that their use of custom portfolios instead of model portfolios set them apart.

Outside of their client relationships (26 percent), advisors also said financial planning strategies (31 percent) and the use of customized solutions (21 percent) were the services that differentiated their practice. Just 3 percent said portfolio performance set them apart.

Regardless, advisors who spoke to IN said both methods are here to stay. For clients with more assets, bespoke portfolios suit their needs and goals, which oftentimes model portfolios can't provide, said Rose Swanger, principal at Advise Finance.

“On the other hand, with smaller accounts, particularly for the young who have just started the investment journey, model portfolio are an excellent tool. While they are learning about investments, professional management actively monitor and trade on their behalf. Essentially, model portfolios take guesswork out and implement the asset allocation consistently and efficiently,” she wrote in an email.

Michael Robinson, business development consultant at Synchronize, said the trend toward more advisors using custom portfolios comes from RIAs being “the captain of the ship,” as they need to have the expertise to tailor portfolios to individual client needs.

While Carla Adams primarily invests her clients in model portfolios, the founder and financial advisor at Ametrine Wealth admited that sometimes certain situations arise where a customized portfolio is needed.

“I have a few clients with concentrated legacy stock positions with large unrealized gains in taxable accounts; selling it all off at once would have huge tax consequences. After discussing the situation with the client, we typically agree to sell off the shares over the course of several tax years,” she explained.

“I then need to customize the rest of the portfolio around the concentrated position to best maximize diversification. I have another client who owns several real estate properties, so to not further weight her assets towards real estate, I have created a custom portfolio for this client without my typical real estate allocation,” added Adams.

Alison Murray Burkett, executive vice president and senior partner and head of enterprise development at Snowden Lane Partners attributed the shift towards advisors using more custom portfolios rather than model portfolios to advancements in technology.

She explained that historically, customized portfolios were limited to larger clients, but technology has now enabled advisors to efficiently manage highly customized portfolios across a broader set of clients.

“I look at it as a lens of technology efficiencies driving access points for advisors to scale custom portfolios and just having that capability is probably driving a lot of that,” she says.

“[Historically], you had this model rebalancing type of technology that took a risk metric type of model portfolio that advisors would establish, and they could efficiently put that in place for a large number of clients, and it was customized up to a point.”

She believes those types of technologies have now become enhanced where advisors can efficiently have a highly customized portfolio across a broad group of clients, all while maintaining the supervision quality that they need, allowing the advisor to stay on top of those customizations.

“We're seeing technology putting tools in the hands of advisors that allow them to bring that level of customization to a broader set of clients. I think that's great and that's a client win, from my perspective.”

Ivan Illán, chief investment officer at Aligne Wealth Advisors Investment Management asserts that despite technology finding its place in customized models, where technology can’t displace them is with unique solutions and perspectives.

“If you are an advisor that is not developing a specific understanding of a particular strategy or technique that you can really articulate as your value relative to just something off the shelf that you know is just programmed, then it's very hard for a client to choose you,” says Illán.

“We have to look at the world very differently, and how we're implementing our strategies and our work. The benefit has to be quite different than what would be popularly available through some app.”

Burkett said the trend for customization likely won’t change with the dynamics of a younger generation.

“I like to take a look at other industries and take a look at the market dynamics within. You look at people customizing their sneakers, and the client need for customization, or the fact that they're used to it [because of their generation].

“I think you'll see something similar. That level of white glove service and the expectation around it, I don't see that going away.”