By Dynamic’s Asset Management Team

Model portfolios can help you spend more time with your clients on what matters most to them. And while you may think what matters most are returns — that’s not what the data shows.

As a wealth advisor, what’s your No. 1 selling point? If you answered your investment strategy or the returns you secure for your clients, you’re probably in the majority. However, you also might not be right.

Several studies have shown that financial advisors add approximately 3% per year in value to their clients’ returns. That’s a significant amount, especially when compounded over several years or even decades. But most of that value comes not from superior asset allocation; primarily, that value-add comes from behavioral coaching.

The so-called “Behavior Gap,” which refers to the tendency to chase performance — in other words, when investors buy high and sell low — can result in gaps of 3% or 4% between the returns generated by the investment and the returns gained by the investor.

Closing that behavior gap is one of the most important ways financial advisors can help their clients. By instilling investment discipline, an advisor can keep clients invested and on track to achieving their financial goals; by managing expectations, they can help them weather the ups and downs of the market.

Your client’s financial goals — buying that vacation home, sending their kids to college or retiring early — is what they care most about. Getting top returns, while that may seem important, is far less so, according to numerous surveys. In fact, the data shows large satisfaction gaps among high-net-worth clients in particular who value advice on not just investment management but estate planning, charitable planning, loan and credit management, business succession planning and more.

So, how can you spend more time on what your clients value most? The Dynamic Asset Management team believes one of the best tools we can offer is model portfolios.

How Do Model Portfolios Work?

Model portfolios combine a mix of investments into a single, more convenient investment offering. They’re managed by a team of investment professionals who consider innumerable factors of macroeconomics, microeconomics and risk management to create a deliberate blend of investments that meet the varied needs of investors.

To select the right model for your client, all you need to do is focus on them. By understanding their goals and current needs, their risk tolerance and risk capacity, you can select the right model that will help them succeed, while leaving the back-end work of monitoring the markets and financial trends, predicting the impact of fiscal policies and the Federal Reserve to a team of dedicated professionals.

There are several ways to utilize model portfolios:

• Insourcers build their own model portfolios.
• Modifiers outsource their models but maintain the ability to customize them to their clients’ needs.
• Outsourcers check in periodically but leave the heavy lifting of model portfolio construction to professional asset managers.

Top 3 Benefits of Model Portfolios

• Model Portfolios Save Time: Whether you’re modifying a model portfolio, creating your own or outsourcing them entirely, streamlining your practice saves time. How much time you save depends, of course, on how much you outsource. But the time saved can be used not only to enhance your relationships with your clients and focus more on what they really care about — the outcomes of their financial plans — but also to give you more time for professional development. Data shows clients care about advisors’ credentials. They want to know that you hold yourself to a high standard. So going for that CFA® or CFP® will likely produce significant dividends for your business.
• Models Produce More Predictable Outcomes: Model-based investing instills discipline in the investing process. And the data backs that up: Several studies of advisors who act as portfolio managers show a higher dispersion of portfolio returns. Many advisors underperformed significantly, and their returns were not predictable. Model portfolios, on the other hand, routinely demonstrate lower return dispersions and more predictable outcomes. Predictability in the markets is a significant value-add for investors who are primed to flee when markets fall and clamor when they rise.
• Model Portfolios are Regularly Rebalanced: Rebalancing often requires selling stocks we like and buying stocks we don’t (the poor performers), which is why many investors and advisors don’t do it as often as they should. But rebalancing is a key element of successful investing — and it’s a routine feature of model portfolios.

How to Educate Your Clients on Model Portfolios

Trust: One reason financial advisors hesitate about incorporating model portfolios into their business is trust. Clients trust their financial advisors, and they may not feel comfortable paying a fee for a portfolio their advisor didn’t construct. However, data shows investors care more about the services and support that advisors provide than their investment acumen. And in fact, they may value their advisor more if they’re leveraging the institutional prowess of a large financial firm on their behalf.

Cost: Another reason advisors cite against the use of model portfolios is cost. Many model portfolios do charge fees. But it’s important to remember that investors are willing to pay fees if they understand their value. If you’re having conversations with your clients about fees in an abstract way, they may not respond well. But if you help them understand what they’re gaining for that price, they’re far more likely to appreciate the value.

How To Implement Model Portfolios

If you’re considering implementing model portfolios into your practice, ask yourself a few questions:

• What is your investment philosophy, and do your clients truly value it?
• Could a model portfolio capture a portion of your investment philosophy?
• How much time do you spend on due diligence, litigation risk and monitoring trends and research?

An honest assessment of how you spend your time and what your clients value is invaluable as you consider whether model portfolios will work for your business. At Dynamic, we’ve seen advisors who are focused on freeing up their time able to grow their practice and engage more with their clients.

A growing business and happy clients? Maybe model portfolios are right for you.

We’re here to partner with you on implementing model portfolios to help streamline your practice. Don’t hesitate to reach out to Dynamic’s Asset Management team at (877) 257-3840, ext. 4 or assetmanagement@dynamicadvisorsolutions.com.

Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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