Model portfolios have emerged as a powerful tool for advisors. They can streamline investment strategies and can help meet almost any client’s needs through strategic asset allocation. Discover key benefits of model portfolios, and recent improvements and tips to incorporate models into your own advisory services to help scale your practice.

Five Stats About the Model Portfolio Landscape

The structured approach behind model portfolios makes them an appealing choice for a wide range of clients, and these investment solutions are currently experiencing a surge in popularity. According to Chris Vella, CIO of BNY Advisors, “Model portfolios represent the fastest-growing segment of the managed account platform. It's pretty incredible in terms of the size and amount of wealth.”

1. Although they’re experiencing rapid growth today, model portfolios have existed for nearly four decades¹.
2. Model portfolios are projected to grow by 15% each year for the next five years².
3. More than 2,500 model portfolios currently are tracked by Morningstar³.
4. Model portfolios represent almost $3 trillion in total assets⁴.
5. Advisors can free up to 35% of their time by not managing money internally⁵.

Five Reasons to Use Model Portfolios

Model portfolios offer a variety of potential benefits for advisors, who often find using these streamlined investment strategies helps carve out space for performance and growth. “I couldn’t hire new people or grow our business because I was busy managing portfolios,” said Richard Williams, Head of Advisor Solutions Group, Sanctuary. “I'm on a mission to encourage every one of our partner firms to consider a transition from rep-as-PM into managed money. It was the best move I ever made.”

1. Simplicity: Model portfolios can simplify the investment process for advisors and, by extension, their clients. Advisors can offer a solution that is easy to understand and in line with their client's goals.
2. Diversification: These portfolios typically provide diversification by including a mix of asset classes. This approach helps spread risk and improves the potential for stable returns over time.
3. Cost Effectiveness: Many model portfolios utilize low-cost ETFs and mutual funds, making them a cost-effective option compared to actively managed accounts. They also reduce the operational costs associated with managing multiple individual investments.
4. Professional Management: Model portfolios are often designed and managed by professional investment teams. This expertise helps ensure that the portfolios are well-researched and regularly updated to reflect market conditions and strategic changes.
5. Time Savings: By outsourcing the management of model portfolios, advisors can save significant time, allowing them to focus on client relationships and business development.

Five Advancements in Model Portfolios

Recent improvements have made model portfolios even more attractive to financial advisors and their clients. As Richard Frick, CEO of Gladstone Wealth Partners and Managing Partner at Integrity, puts it: “If I can provide our advisors with quality technology, ease of opening the account, manager research at half the cost — why wouldn't we use model portfolios?”

1. Customization: In certain cases, advisors can tailor model portfolios to meet specific client needs more precisely. Customization can include modifying asset allocations, incorporating specific sectors or themes, and excluding certain investments based on personal preference.
2. Tax-managed Overlay: Tax overlay services can address holistic needs around tax management, while also maintaining the overall strategy of the client’s portfolio. Tax transition strategies can help clients transition into a model portfolio efficiently and manage the impact of taxes in the model, if needed.
3. Integration of Alternative Investments: Some model portfolios now include exposure to alternative investments to cover asset classes across private markets. This broad-based diversification can potentially provide additional sources of return and risk management.
4. Enhanced Management Tools: Advances in technology have made it easier for advisors to implement and manage model portfolios. Platforms such as BNY Pershing X’s Wove is designed to provide a custodian-agnostic experience.
5. White-Label Solutions: Many firms now offer white-label solutions, allowing advisors to present model portfolios under their own brand for a more consistent client experience.

Five Tips to Incorporate Model Portfolios Into Your Practice

Model portfolios have the potential to eliminate the need for an in-house investment team, a key benefit for growing firms according to Eric Hundahl, Head of BNY Advisors Investment Institute at BNY Investments. "It takes a significant amount of resources to do it in-house, and I think that's absolutely the right play for clients that are big enough. But for those that are still growing or don't want to make that huge investment, then outsourcing it to a trusted investment manager makes a lot of sense, too.”

Below are a few ways advisors still play an active role in offering model portfolios to their clients.

1. Assess client needs: Begin by understanding your clients' financial goals, risk tolerance, and investment horizon. Use this information to select or customize model portfolios that align with their needs.
2. Choose portfolio providers carefully: Select model portfolio providers with strong competitive advantages, experienced managers, and robust support resources.
3. Have a flexible approach: Combine building, buying, and borrowing models to suit different client needs and preferences.
4. Educate clients: Help your clients understand the benefits of model portfolios. Explain how they provide diversification, professional management, and potential cost savings.
5. Maintain oversight: Regularly review model portfolio performances. Stay informed about market conditions and changes in clients' circumstances to ensure the portfolios remain aligned with the clients' goals.

Model portfolios can offer a robust solution for financial advisors aiming to grow their practice. They can simplify investment management, provide diversification, and allow for professional oversight, all while being cost-effective and saving time.

Want to learn more? Contact your relationship manager to find out how model portfolios can work for your clients.