Financial advisors could be missing out on an opportunity to enhance their businesses with model portfolio strategies to provide value and elevate the client experience.
“Your clients are looking to you more today than ever before. You need to be their financial superhero. There is one thing that we identified that can drive significant changes for you – improve client retention, attract clients, drive improved client perceptions, and even better position you for compliance with Reg Bi (Regulation Best Interest). It starts with leveraging expertise,” Brad Shepard, Head of Advisor Innovation, WisdomTree Asset Management, said in the recent webcast, How to Build a Better Business with Model Portfolios.
Recent research showed that model portfolio solutions could help financial advisors better utilize their time and create a more efficient advisory business. These strategies may help improve client retention by 33%, help attract 20% more clients, drive an improved perception of an advisor among 63% of clients, and be better prepared for Reg BI.
Shepard explained that no matter what you call it, a model is simply a framework for a financial advisor to structure asset allocation and fund selection in one’s practice for a client.
When it comes to the financial advisory business, financial advisors have to manage their time efficiently. Clients have expressed their value for expertise, with over 75% of them stating that financial expertise was the most valuable benefit that they receive from using an Advisor. Clients look to advisors to recommend them based on market changes, new technologies, new approaches, and new regulations, which may take up a lot of time.
Shepard argued that incorporating a model portfolio into an advisory business is a way to leverage outside or third-party expertise to help better serve clients. About 63% of investors equate a doctor conducting an assessment to an Advisor understanding their financial needs, and applying a model. Furthermore, 62% of investors believe an Advisor using a third-party model would be applying a more sophisticated approach to their asset allocation that is backed by extensive research and technology.
“Just like the doctor, no one knows your clients like you do…from the investor’s perspective, advisors that use third-party models are combining valuable research and data with intimate knowledge of the clients’ needs to provide a tailored solution for their portfolio,” Shepard said.
The use of models demonstrates a focus on leveraged expertise, and investors are not against the idea of an outside model portfolio. About 86% of investors believe it is absolutely acceptable for their Advisor to apply a “Preset Investment Model” to meet their portfolio needs. Additionally, 60% of investors believe that the application of a “Preset Investment Model” would have a positive impact on their portfolio, and this goes up to 70% for the Millenials group.
“The investors believe the application of models is applying more brains to their portfolio, is an updated approach, demonstrates that you know how to leverage all the financial industry technology to enhance their portfolio and improves analytics and access to industry research,” Shepard said, adding that it is a more “modern approach.”
Clients have even shown a greater preference for financial advisors who incorporate a model portfolio strategy. At any given time, 38% of clients are thinking about shopping for a new Advisor. The percentage increases to 58% for those who would consider switching Advisors if the new Advisor properly promoted a 3rd-party, models-based practice, and an even higher 84% among Millennials.
Shepard believed that at the functional level of servicing a client, leveraged expertise through a model portfolio strategy could help financial advisors spend more time to deliver emotional and life-changing value to clients.
Just because an advisor uses a model portfolio does not mean there is no leeway for customization to fit a client’s needs. Many advisors who use third-party models today modify them to meet specific needs, with 56% of financial advisors modifying models to some degree.
“With third-party models, you are in control,” Shepard said. “Just like the doctor leveraging technology to make a diagnosis, your client assessment guides your decision on model selection and application.
As part of WisdomTree’s core investment beliefs, they argue that market-cap weighting is flawed, fundamentals matter, pricing error, and return premia exist, and ETFs can provide distinct benefits over mutual funds. These core beliefs are incorporated in the WisdomTree Modern Alpha model portfolios, which combine the outperformance potential of active strategies with the benefits of passive indexing to offer investors investment options that are built to perform. Specifically, this so-called Modern Alpha model portfolios provides low cost, transparent investment processes, objective systematic and quantitative methodologies, repeatable and consistent processes, rules-based rebalancing, scalable strategies, and outperformance potential.
For example, the Siegel-WisdomTree Model Portfolios can resolve some concerns in the current market environment, aiming to generate income to maintain lifestyles, constructing globally diversified portfolios designed for more extended time horizons and longer investor life expectations, and creating more tax-efficiency through the ETF structure. The Siegel-WisdomTree Model Portfolios are designed to outperform in a risk-conscious way by overweight equities versus fixed-income to mitigate the longevity risk and by tilting toward historical drivers of return like higher dividend yield and low P/E ratios.
Financial advisors who are interested in learning more about model portfolios can watch the webcast here on demand.