Model Portfolios: Setting the Record Straight | ETF Trends

Financial advisors are missing out on opportunities to incorporate model portfolio strategies into their practices.

“Your clients are looking to you more today than ever before. You need to be there financial MD. 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 Regulation Best Interest – It starts with leveraging expertise,” Ryan Krystopowicz, Associate Director, Product Solutions Specialist, WisdomTree Asset Management, said in the recent webcast, What Clients Really Think About Model Portfolios.

Recent research shows 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, and drive an improved perception of an advisor among 63% of clients.

Krystopowicz 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 prepare them for market changes, new technologies, new approaches, and new regulations, which may take up a lot of time.

Krystopowicz 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,” Krystopowicz 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 Millennials group.

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 is an even higher 84% among Millennials.

Just because an advisor uses a model portfolio does not mean there is no leeway for customization. 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,” Krystopowicz said. “Just like the doctor leveraging technology to make a diagnosis, your client assessment guides your decision on model selection and application.”

Through better control, financial advisors can implement model portfolios for varying time horizons and investment objectives. Based on those granular needs, WisdomTree has developed a models approach that provides a Model Type for most clients, consisting of Strategic, Tactical, Asset Class, and Outcome Focused strategies, where each can be tailored to individual customer preferences.

“We know that many of you modify third-party models if you are using them today. Our research was clear in that point and influenced how we designed our models business. That gives you the ability to customize the specifics of the model to the client,” Krystopowicz said.

In addition, Krystopowicz noted that ETF model Portfolios can significantly lower costs across expense ratios, strategist fees, and platform fees, and they deliver benefits beyond costs, especially when compared to mutual funds. ETF Model Portfolios help avoid capital gains and can even improve tax efficiency. Lastly, models may support regulatory requirements as they can provide a reduced risk threshold relative to duty of care and conflicts of interest.

Financial advisors who are seeking more information on model portfolios can look to WisdomTree’s Model Adoption Center, or MAC, which provides investment professionals convenient access to tools to better understand, apply, tailor, and communicate the benefits of third-party ETF model portfolios to clients.

Financial advisors who are interested in learning more about ETF model portfolios can watch the webcast here on demand.