How model portfolios help Financial Professionals meet client demands
What financial professional hasn’t experienced at least some level of client dissatisfaction? You’ve probably gotten an earful from yours on more than a few occasions. Maybe they expect unrealistically high performance regardless of market conditions. Or want the instant gratification of immediate returns, though returns are often a more distant gratification kind of experience. Perhaps they think you have the power to see into the future and predict market movements even in the face of geopolitical instability and general financial upheaval.
While you can’t necessarily change your clients’ expectations, you can take steps to efficiently navigate their concerns while being honest about what they can realistically expect from their investments. Mastering the ability to do so is critical to your success. Fortunately, there’s a tool you can utilize. Model portfolios can be an invaluable resource for helping you service clients more effectively while tempering their expectations.
What exactly are model portfolios?
At their most elemental, model portfolios are a pre-defined set of investments designed to meet a specific investment objective, risk tolerance, and time horizon. They provide financial professionals with guidance and recommendations for their clients on how to allocate their assets based on individual investment goals and risk profiles. Typically, model portfolios are constructed using stocks, bonds, mutual funds, exchange-traded funds (ETFs)1, and other investments. The mix is based on the investment philosophy, research, and analysis of the financial professional or investment management firm.
Interest in model portfolios has been accelerating of late, and with good reason. These labor-saving tools can save time and simplify your life in many ways:
- Model portfolios can provide consistency in investment strategy and asset allocation2, which can balance risk and return over time.
- Model portfolios can help you quickly identify a suitable match for a client. Instead of building custom portfolios from scratch, you can manage a larger number of clients without sacrificing service.
- Model portfolios can help you with regulatory compliance and because they can be tailored for specific investment objectives and risk tolerances, they may help improve outcomes for client portfolios over time.
Perfect, right? Well, before we get carried away too quickly let’s take a closer look.
The emotional truth and how to handle it
When it comes to investing, it’s not surprising that many financial professionals often find themselves navigating a strong tide of client emotions. The more volatile markets get, the stronger those emotions can be. Add to that the breathless proclamations of industry pundits and even the most grounded clients can get a case of the jitters. So, how can model portfolios help you manage expectations that are out of whack with reality?
Model portfolios can provide a clear and defined investment strategy by setting out specific investment goals, objectives, and risk parameters for the portfolio. They typically follow a predetermined asset allocation, which is based on the investment objectives and risk tolerance of the portfolio. This helps ensure that investment decisions are consistent with the investment goals and objectives communicated to you by your client. It also helps financial professionals to communicate the investment strategy and risk parameters back to clients, which can help manage expectations and reduce the potential for misunderstandings.
Model portfolios can also be adjusted over time to reflect changes in market conditions, economic outlook, or changes in investment goals and objectives. Every investor’s situation is unique. Some investors are risk-averse, others may be willing to pursue the greater returns while tolerating greatest risk.
Broadly speaking, several common portfolio management strategies may be recommended. An aggressive portfolio prioritizes maximizing potential earnings, often in riskier industries or unproven alternative assets. A conservative strategy is more attuned to capital preservation with minimal growth but minimal losses. A model portfolio may blend both approaches, but do so selectively. Or strategies may address a specific need such as regular income in retirement or minimizing a tax bite. In any event, regularly reminding clients of what strategy you’ve agreed to pursue can help you manage expectations, even in the face of changing market conditions. But how do you choose a suitable portfolio strategy?
Surprise not surprised: communication is key
Regular communication with clients can go a long way toward keeping them calm when markets aren’t. You’re partners in the process and assuring them that you’re working together to achieve their goals is a key part of staying on the same page.
So how do you figure out what’s best for them? An array of methods and tools can help you decide, depending on your clients’ goals and objectives. Consider the following:
What is their risk tolerance? You may have to do some digging here as many clients will only have a vague notion of how much risk they can take. Questionnaires designed to uncover this information and conversations with your client will be a big help.
Your client’s goals. Are they clear on what they want to achieve? A retirement nest egg? Saving for education? Purchasing a home? These all have different timelines and require different approaches that call for different types of investments or asset allocation strategies.
Asset allocation. Once you understand a client’s risk tolerance and investment goals, you can recommend an appropriate strategy, determining what percentage of a client’s portfolio should be allocated to different asset classes.
Helping clients understand diversification3. A diversified portfolio, which usually involves investing in different types of securities, sectors, and geographic regions can help manage risk and increase the likelihood of achieving long-term goals.
Rebalancing4. Selling some investments and buying others may be necessary to maintain the desired asset allocation. Letting clients know why and reviewing portfolios with them ensures that you both remain aligned on their goals and gives you a chance to alleviate any concerns.
There are no cookie cutter solutions and adapting a “one size fits all” could be hazardous to client relationships. Even a “one size fits many” approach should be pursued cautiously! But there’s no doubt that identifying the right model for your clients will make you both happy.
Integrating model portfolios into your advising practice
The introduction of any new resource requires doing your due diligence There are a wide variety of potential outsourcing partners with varying philosophies and investment styles to choose from. But here are some basic steps that can make the process smoother.
- Evaluate diligently. Consider the investment philosophy, asset allocation, and past performance of each outsourcing partner and be sure they align with client goals, risk tolerance, and other needs.
- Consider your client base. What are their investment needs? Which model portfolios should be considered taking into account their investment goals, time horizon, and risk tolerance.
- Utilize technology. A good software platform will provide a simple user interface, and powerful proposal and analysis tools, and integrate seamlessly into your firm’s tech stack.
A final word about expectations
Rational or not, unrealistic client expectations will always be part of the business, driven by emotion and exacerbated by whatever may be going on in the market at any given time. But by using model portfolios you’ll have more time to focus on what clients value most: excellent service and meaningful relationships, which can go a long way toward bringing those demands back in line with reality. While performance matters, it’s the reassurance and guidance you provide that helps them feel good about working with you. And of all the returns you get as a result of implementing model portfolios, that additional time to spend with clients may be the most important dividend of all.
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