How to make the most of models on platforms or subscriptions websites
As interest in model portfolios continues to grow among financial professionals, you may be considering integrating these valuable tools into your practice. You may already know that there are a variety of model types available for your consideration, and there are also different ways you can access them. In this article we’ll explore a couple of the specific types of models, as well as your options for accessing them so you can begin leveraging these powerful tools today.
If you’re familiar with model portfolios, you may already know that target risk and completion portfolios can offer a number of intriguing possibilities to financial professionals and their clients: enhanced diversification1, exposure to multiple or specific asset classes, and the ability to fine tune based on an investor’s risk tolerance. But before diving into why a financial professional might choose one or the other for their clients, let’s start by outlining the differences between them.
Target risk portfolios, as the name implies, are built based on an investor’s risk tolerance and aim to maintain a specific level of risk throughout the investment period. These are also sometimes referred to as core portfolios. Typically having a predetermined asset allocation strategy based on a risk-return tradeoff, these model portfolios are usually categorized into conservative, moderate, or aggressive risk levels. Each one corresponds to an asset mix that determines the percentage allocated to different asset classes like equities, fixed income, alternatives, and could include a cash allocation. The asset allocation is based on historical data and statistical analysis to achieve desired risk and return objectives.
Completion model portfolios, sometimes called satellite portfolios, are typically used to supplement an investor’s existing core portfolio with additional asset classes or investment strategies to further diversify or optimize it. They are designed to do so by filling in gaps or enhancing diversification, based on specific investment objectives or strategies not adequately represented in an existing portfolio. These could include exposure to specific sectors or regions, alternative investments2 like real estate or commodities3, or specific investment styles such as value or growth. Completion model portfolios do not necessarily have a predefined risk level. Their risk and return characteristics vary depending on the specific objectives and strategies being implemented.
Choosing the appropriate target risk and/or completion model portfolios is a critical decision for an array of reasons. It helps you provide suitable investment advice to your clients, manage risk effectively, enhance diversification, and leverage your expertise in constructing portfolios that align with your clients’ goals and preferences. Having the right data at your disposal can help.
Platform access or subscription websites?
Platform access and subscription websites are two different ways to access the tools, resources, and information you need to make the best decision for your clients when using these models.
Platform access is a comprehensive framework or set of software provided by a financial services company designed to supply financial professionals with a range of services and tools to support various investment management activities: portfolio construction, asset allocation, risk management, performance reporting, and rebalancing. They often provide access to a variety of investment products, as well as research reports, market data, economic analysis, and investment research from credible sources. Frequently these platforms also aid in client relationship management (CRM) and client onboarding, facilitating efficient communication and partnership between financial professionals and clients. They can help with compliance and documentation of client interactions and may be integrated with other tools (such as financial planning software or trading platforms) to streamline workflows and improve efficiency. Two examples of the largest such providers in the industry are Envestnet and AssetMark.
Subscription capabilities typically live on asset manager websites or within platforms at no cost. These services allow the financial professional to “subscribe,” typically via an email or in-platform notification, to model portfolio updates made by the asset manager managing the portfolios. Once an update to the underlying allocations has been made, the financial professional can choose all or parts of the model portfolio’s underlying holdings to implement in client accounts.
Both have their advantages. Ultimately, the main differentiator is the discretion the financial professional wants when it comes to portfolio implementation, trading, and rebalancing4. On platforms, the asset manager typically has discretion over the changes made to the underlying holdings while for subscription services, the financial professional can choose if and how much of the model’s asset allocation guidance they want to implement in client accounts.
The pros and cons of platform access
Platform access is becoming increasingly popular among financial professionals for a number of reasons. By accessing model portfolios on platforms, financial professionals can avail themselves of professionally managed third-party investment solutions that can nimbly trade and rebalance for them or give them the option to implement trades themselves. It provides a comprehensive solution, can improve efficiency, and enhance the client experience. Additionally, it offers access to research and analytics, facilitates integration and scalability, and makes regulatory compliance easier and less time consuming.
That said, platform access is not without some disadvantages. To begin with, it may not cater to every financial professional’s specific needs or preferences. Platform access can come with significant costs. It takes time and effort to become familiar with the platform’s features and functions, potentially adding another cost to ensure adequate training.
To subscribe, or not to subscribe
Some financial professionals prefer subscription websites for model portfolios and with good reason. They can often provide specialized content catering to specific areas of interest, offering in-depth research reports, analysis, and commentary on specific strategies, or emerging trends.
You can choose subscriptions that align with your preferred investment style or area of specialization. Many subscription websites provide educational resources that can help enhance your professional development. And while some subscription websites have associated fees, they can be cost-effective compared to other sources of specialized information or resources, offering a more targeted and cost-efficient approach to accessing specific content and resources.
Like platform access, however, subscriptions have downsides as well. Because subscription websites typically offer investment strategies designed for broad market segments they may not fully align with the unique preferences of a financial professional’s clients. And since subscription websites provide pre-designed models, financial professionals may be limited in their ability to incorporate unique investment ideas into the models provided by the website. To counter this point, many financial professionals subscribe to multiple asset manager’s model portfolios and blend together the best of breed asset class allocations to arrive at a portfolio suitable for their clients.
Choosing the right option for yourself and your clients
Both subscription websites and platform access have advantages and disadvantages for financial professionals, so how can you be sure which one is right for you? The short answer is you can’t; but taking some key factors into consideration can help you decide if one or the other may work better for you.
Assess whether you need a comprehensive solution that integrates various tools and functionalities (platform access) or if you require specialized content focused on specific areas of interest (subscription websites). Evaluate the cost implications and other expenses associated with each option. How much will it cost to train your team on the option you choose and how long will it take? Is it more important for you to have customization or outsource trading to a platform? What are the integration capabilities of both options? Assess the compliance features and tools offered by each. And consider how your existing technology stack, as well as present and future scalability requirements fit with your overall operation. Carefully considering these factors will enable you to make the right choice for your specific requirements, goals, and future aspirations.
Whether you choose platform access, subscription access, or a combination of both, making use of model portfolios will be a potentially powerful way to enhance your practice, helping you work more efficiently and productively. As the investing landscape grows increasingly complex and the regulatory environment continues to evolve, investing in either of these tools can add significantly to the suite of resources at your disposal for improving how you service clients.