Are Asset Allocation Model Portfolios Right For Your Clients?

Asset allocation model portfolios offer clients a diversified investment mix in a streamlined package. Advisors can use model portfolios to blend different asset classes and investment styles, and tailor them to specific financial goals. Which clients can benefit from a model portfolio? We’ll review when to consider and how to utilize model portfolios as a financial planning tool.

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Serving Clients With Asset Allocation Model Portfolios

Model portfolios offer advisors (and clients) variety in their underlying holdings and investment strategies. We’ll break down some of the advantages of using model portfolios as an advisor a little later on. First, let’s look at how they can meet the needs of different client personas.

1. The Client Who Plays It Safe

Some clients are naturally more risk-averse than others. While they’re not against putting money into the market, they want some reassurance that volatility won’t pose an oversized threat to their portfolios.

For these clients, it could make sense to apply an income and growth approach. With this type of model portfolio, clients have equal exposure to both equities and fixed income.

If your client is more than just moderately risk-averse, you might dial the weighting of equities down. For instance, you might use a model portfolio that allocates 30% to U.S. and international equities and 70% to U.S. and international fixed-income investments.

2. The Client Who Prefers Simplicity

You may have clients who are decidedly unfussy about building wealth. They want to see gains in their portfolio, and they’re comfortable with taking a moderate amount of risk to do it. This type of client may appreciate a 60/40 model portfolio.

A 60/40 split offers room for growth with stocks, while building in some stability with bonds and other fixed-income investments.

Long considered a gold standard for investing, some have argued that the 60/40 portfolio is dead and that a different asset allocation can better serve client needs. For instance, if your client is open to broadening their horizons a little, you might suggest an allocation of 60% equities, 20% bonds and 20% alternatives.

3. The Income Seeker

An advisor reviewing a model portfolio with their clients.

An income model portfolio could be appropriate for clients who want to generate current income from dividend-paying stocks, bonds and cash. The model portfolio’s focus largely determines the underlying investments.

Income equity funds, for instance, may be composed of 90% equities in the form of dividend ETFs with the rest in bonds and cash. An income bond fund, on the other hand, may be 90% bond ETFs and 10% cash or dividend stocks.

What type of clients may be focused primarily on generating current income? Retirees or near-retirees are an obvious choice, but this type of model portfolio could also benefit clients who may be seeking to fill temporary cash flow gaps or fund a goal that requires cash in hand.

4. The Risk-Taker

Clients with a higher risk tolerance or a longer time horizon until retirement may prefer growth or aggressive growth model portfolios.

With the former, equities typically make up 80% of holdings, with fixed income accounting for the remaining 20%. The latter may have an asset allocation that’s 100% equities.

These types of model portfolios can offer higher return potential for clients who understand and accept the level of risk involved.

5. The Tax-Focused Client

When building financial plans for clients, taxes are a key consideration. A balanced model portfolio can offer both current income and growth while managing a client’s tax liability.

A typical allocation may be something along the lines of 55% in equities, 40% fixed income and 5% in alternatives, such as real estate.

The equities portion may be split between small-, mid- and large-cap companies and include exposure to international stocks. Fixed-income holdings may include tax-exempt bonds or bond funds.

Benefits of Using Asset Allocation Model Portfolios

Model portfolios offer benefits to clients and advisors alike. Implementing model portfolios can enhance the client experience, while allowing you to serve them to the highest standard.

Here are some of the best reasons to consider using model portfolios with your clients:

Increased efficiency. Time is often a limited resource for busy advisors, and model portfolios can free up more of it in your daily routine. Rather than building a portfolio from the ground up, you can select an asset allocation model portfolio that aligns with your client’s needs. That leaves you more time to focus on other aspects of planning or running your business, such as marketing.
Adaptability. While model portfolios are structured around a specific asset allocation, they still offer room for customization. When you choose a model portfolio for a client, you have an opportunity to adjust the allocation around their goals, needs and risk tolerance.
Rebalancing. Model portfolios are constructed based on a set asset allocation. This allocation offers you a framework to follow as you rebalance client portfolios to manage risk. A model portfolio also makes it easier for clients to visualize their allocation and risk exposure over time.

Implementing Model Portfolios in Your Advisory Practice

If you’re interested in the possibilities that model portfolios might offer, the first step is researching the various provider options.

As you compare model portfolios, consider not only asset allocations, but who’s behind them. It can also help to ask yourself the following questions:

Are they a trusted provider of model portfolios?
Which models do they offer?
What kind of support is available to help you integrate model portfolios into your practice?

The best model portfolio providers have a solid industry reputation and a team of experienced investment managers at the helm. Here are a few additional tips to keep in mind as you move ahead with model portfolios:

Consider what your clients need and which portfolios are most likely to meet those needs.
Talk to your clients about the model portfolios you use and how they’re designed to help them achieve their goals while managing risk.
Review performance regularly to ensure that the portfolios you’ve selected are delivering what your clients expect.

Remember that model portfolios can’t predict which way the market will move. It’s important to monitor market trends to gauge how they may impact your clients who use model portfolios.

Bottom Line

A financial advisor reviews asset allocation model portfolios.

Model portfolios are designed to help you take your clients from Point A to Point B as smoothly as possible. If you’re not using them in your business yet, consider whether any of your current clients — or the ideal clients you’re hoping to attract — could benefit from these investment tools.

Tips for Growing Your Advisory Business

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If you’re not ready to make the leap into model portfolios yet, you might consider using a portfolio visualizer tool in your practice instead. A visualizer allows you to run different scenarios to get a visual representation of investment outcomes. These tools can make it easier for you and your clients to see what happens in their portfolio if you do X, Y or Z.