Invesco Global Consulting Personalize wealth management with model portfolios

A comprehensive financial plan clearly maps out ways to help a client reach their long-term goals. In our view, a personalized investment management strategy is integral to that plan. We believe every client is unique, and a wealth manager needs to account for their individual goals and preferences when finding their ideal asset mix. Model portfolios may pave the way to personalization.

We believe a strategy should start with a written philosophy or proposal statement that guides portfolio planning and implementation. Aligning during the onboarding stage sets the right tone for the relationship. According to Practice Innovation Index respondents, only one-third (34%) of clients have a written investment philosophy and/or personalized investment proposal. The percentage jumps by more than a quarter (43%) for ultra-high-net-worth clients ($10 million or more in assets under management).¹

An investment proposal sets guidelines and expectations for how portfolios are built and managed. The client generally needs to generally understand why decisions are made and how they fit into the big picture. Collaboration may help cultivate that understanding, giving the client a sense of control and ownership that may help them stay focused for the long term. But developing a collaborative working relationship requires digging deep to discover what makes the client unique as a person and an investor. The goal of this exploration is to devise a personalized portfolio that suits the individual client.

Approaches to portfolio implementation

Wealth managers draw on a variety of portfolio implementation approaches, including strategic, tactical, and dynamic asset allocation.

Strategic asset allocation

The majority of Practice Innovation Index respondents (83%) favor strategic asset allocation,¹ which leverages historical/forecasted risk assessments to determine a long-term asset allocation. Strategic portfolio allocations tend not to change based on short-term market conditions. We believe this structured approach to portfolio implementation encourages a longer-term perspective. Such discipline may help clients focus on future goals rather than react to present-day market volatility.

Tactical asset allocation 

More than half (57%) of Practice Innovation Index respondents look to tactical asset allocation as well.¹ Typically a more active style of investment management, this method favors allocation adjustments based on short-term market conditions. Tactical allocations, unlike strategic allocations, aim to manage risks based on a shifting market.

Dynamic asset allocation 

According to Practice Innovation Index respondents, more than one-third (37%) of wealth management practices engage in dynamic asset allocation with a wide variety of asset classes and exposures put to work across both public and private markets.¹ This approach frequently evaluates portfolio weightings based on various market cycles, which generally takes more time and effort. The process requires frequent monitoring and more portfolio management, research, and due diligence to identify investment opportunities and make informed asset allocation decisions.

Whatever the method used, wealth managers should systematize their strategy in an effort to keep themselves and their clients on track during periods of heightened volatility. There are opportunities to scale these solutions via model portfolios. Wealth management practices may benefit from outsourcing portfolio construction to a third party with more sophisticated portfolio management systems, technology, and due diligence capabilities.

Model portfolio adoption

Wealth managers face a growing demand to deliver more personalized services. Holistic financial planning and comprehensive wealth management is time and labor intensive. Leveraging model portfolios may free up resources to focus on the personal aspects of client relationships. They may help create additional efficiencies, may generate more predictable outcomes and may help mitigate regulatory risk.

Practice Innovation Index respondents look to model portfolios for nearly half (49%) of their clients. Practices with more size and scale — megateams with $500+ million in AUM — rely on model portfolios for even more (57%) of their clients. 

Practices that outsource portfolio construction tend to serve the mass-affluent market — those with between $100,000 and $1 million in investible assets. Wealth managers focused on high net worth (HNW)/ultra-high net worth (UHNW) households are less likely to rely exclusively on model portfolios. This dynamic has historically held, and recent data also bears this out. According to Practice Innovation Index respondents, practices with an average client size above $10 million turn to model portfolios for a little over one-third (38%) of their clients.¹

Cerulli Associates, the research and consulting firm that powers the Practice Innovation Index, doesn’t expect wealth managers to adopt model portfolios for HNW/UHNW segments without customizing them and building out other offerings. But looking down-market, the average client size of wealth managers who adopt model portfolios may grow as they scale. More time for relationship building and new business development could be why. Increased productivity, better service, and improved interactions point to a competitive advantage.²

As one independent registered investment advisor (RIA) reported, “Incorporating model portfolios has improved the client experience and considerably increased the practice’s margins. Since we started using model portfolios, the time spent on investment management has gone from a significant portion of my week to only a few hours a week. This has allowed me to free up capacity to focus on other value-add activities, including financial planning, which has enhanced the client experience and deepened client relationships.”³

Practices interested in a more comprehensive wealth management approach should think about model portfolios. Their addition may free up time and resources for financial and advanced planning. More and better financial planning, for example, may open up opportunities for growth with both new and existing clients. The use of model portfolios should in our view continue to grow as practices realize their potential time and cost benefits and as home offices encourage more financial planning and comprehensive wealth management in the field. 

Learn more about how using model portfolios can help your practice.