Don’t Be Shy About Using Model Portfolios

Model is not a four-letter word. Advisors continue to embrace model portfolios as an effective way to invest client assets. Whether built in-house or by a third party, models provide clients with a consistent investment experience and streamline your business. But while some advisors are hesitant to use models, others are hesitant to reveal they use them. They shouldn’t be.

The 2023 Models Report from the Natixis Center for Investor Insight highlights three findings related to model usage:

1. Clients invested in models are more likely to say they trust their financial advisor when making financial decisions (97%) than those who are not in models (73%).
2. 78% of investors in model portfolios view market volatility as an investment opportunity compared to just 47% of non-model clients.
3. Investors in models are half as likely to say they feel stressed out about their finances (11% of model users vs. 23% of non-model users).

In short, model investors are more confident, more optimistic, and less stressed – sounds like an ideal client profile.

But Wait, Am I in a Model?
So what’s the problem? It turns out that 22% of individual investors working with advisors aren’t sure if they are in a model or not. A generous reading of that statistic could be that they’re invested in a model and just forgot. Or they aren’t invested in a model and just forgot. But the most likely scenario is that they’re in a model, but their advisor didn’t tell them.

Hesitancy to disclose the use of models is often due to fear of how the client might react to that news. In a highly customized world where “a venti salted caramel mocha Frappuccino with four pumps of caramel, three pumps of mocha, and extra whipped cream” is not an unreasonable coffee order, clients learning they’re getting a one-size-fits-all portfolio might not sit well. This is particularly true for high net worth clients who expect custom solutions tailored to their unique situation, goals, and preferences.

What Models Bring to the Table
But models serve an important role that benefits clients. They free up valuable time for advisors to focus on higher order items beyond asset allocation – the areas where truly personalized advice is required, such as estate and tax planning, retirement income planning, asset location, tax-efficient strategies, and private investment opportunities.

In our portfolio consulting work with thousands of advisors over the past decade, we know the perception of a static set-it-and-forget-it model is off base. Increasingly, models are dynamic portfolios specifically designed to navigate the rapidly changing macroeconomic landscape. Most often (66% of the time), advisors use an in-house firm model with a tweak or two. A quarter of models in use are built by third-party asset managers. These “strategist” models are managed by some of the largest and most experienced global asset managers who thoughtfully combine investments in pursuit of superior risk-adjusted returns.

Hidden Benefits – Including Customization
While clients might think models are simple, impersonal portfolios designed only for the advisor’s convenience, models offer a range of investor benefits behind the scenes, including:

• Tactical management that can capitalize on market opportunities
• Expertise of full-time professional money managers
• Due diligence teams who select best-in-class equity, fixed income, and alternative products
• Risk monitoring at the portfolio and security level
• Automated trading and cost savings derived from economies of scale

And models are rapidly evolving beyond the standard mutual/ETF variety to include customization. High net worth models now cater to clients in higher tax brackets by offering tax-efficient investment vehicles like direct-indexing Separately Managed Accounts. Clients in the decumulation phase of retirement benefit from income-focused models. And models incorporating alternative investments and ESG factors are readily available. In short, the expansion of the model universe results in model portfolios better aligned with investor needs.

It’s a misconception to think clients will want to opt out of being invested in a model. The opposite is true: clients invested in models are more likely to trust their advisor’s decisions. Incorporating models into your practice can be a win-win, but don’t be shy about letting your clients know it. Tell them why you’ve decided to use models – and then spend your time providing higher-level financial advice.