An Investment Advisor’s View of Model Portfolios

When Brad Bickham (principal and CIO at Sargent Bickham Lagudis) first started out, he wasn’t using model portfolios; far from it.  In an August article from the Wall Street Journal’s Voices column, Bickham describes how initially he gave clients a large amount of latitude in determining their own asset allocations.  Eventually, he began to question whether the time and money being spent on multiple transactions for each individual client portfolio was worth it.  Since each portfolio would usually have a slightly different allocation than the others, handling them separately meant constantly making adjustments to each one to keep them aligned with their goals.  In the case of multiple portfolios geared towards the same kind of goal, Bickham decided he could no longer justify the one-on-one approach.

Model portfolios make sense on a number of levels.  Fundamentally, they are a reaction to pressures coming from a rapidly changing RIA market.  Currently we are seeing extreme pressure on advisor fees driven by competition from robo-advisors and new national RIA firms.  At the same time, advisor costs are also rising in response to consumer demand for more digital interaction and a general increase in labor costs.   RIAs caught in the middle of these negative market forces are feeling the crunch and scrambling for ways to increase efficiency and scalability without sacrificing client experience.  Enter the model portfolio.  Using models, advisors can scale their investment services while providing a consistent experience across a larger client base.  Disregard naysayers who say models allow for no personalization.  Adhesion Wealth, for example, allows the RIA to define model portfolios and customize them with certain rules and preferences.  Advisors can have the best of both worlds.

Now, Bickham uses models that contain investments he and his firm have already vetted, along with asset allocations that align with common investor goals and risk tolerances.  Clients pick an allocation that lines up with one of the models, and that model will then inform decision-making for each client with that allocation.  In Bickham’s words,

“It simplifies things for the firm, because we’re focusing on a smaller set of investment decisions that can be translated across the entire firm and benefit everyone.  We also find that the models improve our ability to communicate with clients and monitor their investment performance.”

However, Bickham also points out that even with model portfolios, advisors still play a “critical role” in analyzing each client’s individual situation.  For example, the models his firm uses are tax insensitive, so if the implementation is not being watched over by the advisor the client could end up with too many realized gains.  He also warns that clients may become concerned if they see the advisor making too many within the model.  He suggests a middle-ground between following the model and too much activity that could result in fees, taxes and more trading than the client is comfortable with.

We believe that implementing the kind of model portfolio strategy described in the article not only increases efficiency, but just as importantly frees up time that can then be focused on front office activities that add alpha.  This is a great way to shed some back-office baggage and explore new ways to strengthen and nurture client relationships.  Time once spent making small trades on 15 different portfolios could be used to take a client to lunch or a meeting to discuss substantive long-term planning.  There are two benefits to clients here.  Obviously, any client would appreciate a noticeable increase in their firm’s efficiency, but far more compelling is the additional alpha that an advisor can provide by freeing up time and resources.  Ultimately, everybody wins.

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