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Better Portfolio Propositions

Model Portfolios – Commonality in the Chaos

Professional fund managers employ significant intellectual resources and systems firepower in order that they can extract excess return from markets in a structured and consistent manner. Of utmost importance to the investors they represent, the ability to explain the sources of return and attribute them to a repeatable process is key in gaining investor confidence and attracting funds, and also retaining funds when returns aren’t the best.

Similarly, high net worth investors that entrust their funds to professional wealth managers also seek the confidence of knowing the process – in which their life savings are being invested – is a robust and repeatable process that is managed in a structured manner, rather than choose services based on something opaque, such the ‘knowledge and experience’ of some guru stock picker.

For most wealth management firms, model or guidance portfolios is the crystalisation of the firms’ research process and represents its best portfolio ideas at the time in a hypothetical sense (i.e. if a client portfolio was being implemented from scratch today).  Having a common research basis for portfolio recommendations across the entire client base is extremely useful from a scalability and compliance point of view (having a demonstrable basis of recommendations). It is also widely recognised that having structure and definition around a ‘best ideas’ portfolio in terms of security selection and weightings is an important aspect of risk management and ensuring appropriate diversifications across the client base.

However, as a basis of portfolio recommendations, model portfolios introduce the paradox of scalability benefits, coupled with implementation inefficiencies.
The implementation efficiencies arise because of:
1)    Legacy positions in existing portfolios
2)    Customisations for each client related to tax positions, preferences, exclusions and other specific instructions not perfectly in line with the prevailing model

In most practices a significant proportion of adviser and paraplanning time is utilised to align the hypothetical model portfolio with client portfolios overlayed with client rules, tax management and instructions. And while model portfolios introduce a thread of commonality across client portfolios, the process of custom overlay creates chaos in the kitchen from an admin perspective and often the use of spreadsheets (that are often prone to error) and manual tasks is prolific.

The modern day reality is that in order for a wealth business to scale (through alleviating the time required by client advisers to implement a model portfolio with client customisation) the overlay process needs to be become systemised, scalable, and repeatable. In a world of limited resources, the only alternatives are all negative (higher cost of delivery, less client engagement time, less customisation, less frequent reviews, more propensity for operational errors).

This is why Financial Simplicity has researched and finessed over time the process of aligning model portfolios to client portfolios incorporating personal overlays for each client. This is also the reason why if you are operating a wealth management business and want to deliver  tailored portfolios to clients in an efficient manner that also adds value to their experience and your business, it may be worth your while to call Financial Simplicity today for a  confidential discussion about how we can scale the delivery of your firm’s best ideas across your client base.

Stuart Holdsworth

Author Stuart Holdsworth

Stuart has over 30 years of experience in the use of technology for the strategic competitive advantage of businesses in the financial markets and investment industry.

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