Use of model portfolios grows alongside demand for comprehensive financial planning

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Advisors are turning increasingly to model portfolios as a way to free up time for more comprehensive financial planning work and better client service, according to a recent report from Boston-based research and consulting firm Cerulli Associates Inc.

The research published in October found model portfolios can have a meaningful impact on advisors’ practices. Advisors who reported customizing portfolios on a client-by-client basis spent 29.5 per cent of their time focused on investment management. For those who used practice-level resources to build a series of custom portfolios, it was 18.5 per cent of their time. In contrast, advisors using model portfolios spent less than 10 per cent of their time on investment management.

Cerulli says it expects the transition to model portfolios to continue as part of the industry-wide shift away from commissions-based revenue and toward a financial advice-based service model. It also noted many advisors don’t have the scale and resources to justify customized portfolio construction.

Brad Bruenell, associate analyst, wealth management, at Cerulli, says in the report that the time advisors save with model portfolios could be put toward client-facing activities – something he notes is particularly helpful for young advisors growing their businesses.

Kevin Greenard, portfolio manager and senior wealth advisor with The Greenard Group at Scotia Wealth Management in Victoria, says having model portfolios has simplified his investment management work significantly, and called model portfolios the “only way to manage money effectively in a volatile market.” Mr. Greenard’s firm has three models – growth, moderate growth and balanced.

“As a wealth advisor, you would have to call each client individually and verbally confirm the trade,” he says, noting that being on the west coast, where markets open at 6:30 a.m., would slow down that process further.

“Clients would rather I spend time researching what the next good purchase would be. At the end of the day, the relationship is based on trust.”

Marc Lamontagne, certified financial planner (CFP) and founding partner of Ryan Lamontagne Inc. in Ottawa, adds that model portfolios ensure fairness among clients in this scenario. His firm has three models, which are overseen by an investment committee that meets quarterly.

“From the client’s point of view [they might be asking], ‘Am I the first call or the last call? Did you make this decision three months ago and you’re just getting to me now?’” he says. “From a fairness point of view, everyone gets treated the same.”

Mr. Lamontagne also thinks model portfolios simplify practice management. All the advisors in his practice used to do research and recommend their own customized portfolios to clients until about 15 years ago when they compared notes and found their ideal portfolios weren’t all that different.

They decided to develop models to “concentrate our effort to come up with the best possible asset allocation and securities,” he says. The firm now has three models, with about 75 per cent of its assets under management in its balanced model.

Mr. Greenard says the models have led to deeper, holistic financial planning-focused conversations with his clients.

“We talk about their future cash flow needs, what their goals are … all the important things going on in their lives and get updates in that area,” he says. “That’s what the focus of the meetings are, rather than why one stock is better than another.”

Active versus passive investing

Justin Bender, CFP and portfolio manager with Bender, Bender and Bortolotti at PWL Capital Inc. in Toronto, says having his group’s suite of exchange-traded funds-based model portfolios listed online has been helpful in client prospecting and ensuring the right advisor-client fit from the start.

“Clients can come to our website, check out our model portfolios and if they’re looking for a passive investing philosophy, they know they’re in the right place,” he says.

“Whereas if someone comes along looking for a more active approach, I’m guessing we won’t hear from them.”

Mr. Bender says model portfolios can also be useful in catching performance reporting errors.

“If you look at a client’s returns and they seem off in relation to the model, maybe a contribution wasn’t accounted for properly in the software,” he says.

Mr. Lamontagne notes that model portfolios ensure investment management consistency for clients at times when their advisors are away from the office such as for vacations or extended leaves of absence. When Mr. Lamontagne took a three-month sabbatical in 2015, he says clients knew their portfolios would be well looked after by the firm’s investment review committee.

Customizing for specific needs

But advisors stressed that having model portfolios doesn’t mean one size fits all.

Mr. Greenard says his firm gives clients the ability to incorporate any unique preferences into their investment policy statement – such as if they come to his firm with a large holding in a former employer’s stock, or have a strong ethical objection to a certain holding.

“The majority of clients don’t, but there are cases in which clients want to do something that’s not in the model portfolio,” he says.

“If we think that’s still fine, great, as long as the position size is straightforward. If it’s large or we’re uncomfortable, we’ll update the investment policy statement to indicate they’re comfortable with it.”

Mr. Lamontagne says he also customizes for clients with specific needs. Someone with a registered retirement income fund who needs to take out income, for example, will need some customization on the amount of cash and income investments in their portfolio.

“But it does exclude certain clients who want to provide input on the management,” he says.

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