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What is a model portfolio and why is it important to our industry?

January 28, 2024 Walt Butler By Walt Butler

A model portfolio is a carefully constructed investment blueprint for managing client assets. It includes diverse investments across various asset classes such as stocks, bonds, and cash, designed to help a client reach their financial goals within their risk tolerance.

Model portfolios have gained significant importance in the wealth management industry due to their ability to streamline and optimize investment management processes.

For firms, model portfolios offer several benefits. They:

Advisors also benefit from using model portfolios as they save time on research and analysis, allowing them to focus more on client relationships. By leveraging pre-designed investment strategies, advisors can provide personalized advice tailored to individual clients’ needs.

Overall, model portfolios enable firms to achieve scalability and revenue growth while providing a unified managed household (UMH) approach for clients from accumulation through retirement. Tools like those from LifeYield can help enhance tax optimization, making a client’s household portfolio more tax-efficient and ultimately leaving them with more money.

Model portfolios play a crucial role in the financial industry by optimizing investment management processes, enhancing advisor efficiency, and delivering superior outcomes for clients.

What Is A Model Portfolio?

In short, a model portfolio is a collection of carefully selected assets and target allocations.

Model portfolios are a structured and standardized framework of a firm’s investment strategies, acting as tools for financial advisors to pull from when selecting an investment approach for a client based on their risk appetite and time horizon. These portfolios are crafted by investment professionals and contain combinations of various asset classes, such as stocks, bonds, and other securities, designed to meet specific risk profiles and financial goals. Firms can use model portfolios developed by institutions like BlackRock and Fidelity, or a firm’s in-house investment committee can develop their own model portfolios.

The emphasis on diversification within model portfolios is a key feature, as strategically spreading investments over different asset classes and sectors helps to mitigate the impact of underperformance in any one area.

Model Portfolio Benefits for Firms

Model portfolios offer firms an advantage by providing them with control over how their advisors manage client investments. By creating and managing proprietary model portfolios, firms can align their investment strategies with clients’ unique goals and objectives while boosting advisor productivity when it comes to the ongoing management of portfolios.

Firms can also add their own funds to their model portfolios, generating higher inflows for those funds and greater revenue revenue for the firm. Additionally, integrating the firm’s own funds into model portfolios allows for greater flexibility and customization, enabling them to meet the specific needs of their clients.

This not only leads to increased assets under management (AUM) but also attracts a larger client base, ultimately resulting in firm growth and scaling opportunities.

Control over investments in model portfolios

By controlling investments in model portfolios, firms can create repeatable, scalable processes their advisors can use to allocate, personalize, and manage more client portfolios. This enables them to offer tailored investment strategies and meet clients’ financial goals more efficiently.

Having control over investments in model portfolios also provides firms with the flexibility to adapt to changing market conditions. They can actively monitor and adjust portfolio and fund allocations, ensuring that they remain aligned with market trends and client preferences.

Additionally, this level of customization enables firms to implement various investment strategies, such as diversification or sector-specific allocation.

Increased AUM & client base

Here are four reasons why firms incorporating their own funds into their model portfolios can be beneficial:

  1. Increased AUM: By offering model portfolios that include your firm’s own funds, you have the potential to attract more assets from clients who value the expertise and research behind these investments. Model portfolios also allow advisors to spend more time building relationships with clients and expanding their client base, contributing to their AUM.
  2. Personalization: Including a firm’s own funds into their model portfolios can provide clients with a broader range of investment choices, increasing the likelihood of higher returns with better risk management and personalization.
  3. Client retention: Offering a comprehensive suite of investment options through model portfolios strengthens relationships with clients. It demonstrates an ability to generate higher returns without relying on mutual funds that are being controlled by a professional whom the client does not know or necessarily trust.
  4. Competitive edge: Firms that incorporate their own funds into their model portfolios set themselves apart from competitors who may not have this capability or do not have funds established.

Firm scaling

Scaling your firm’s growth can be a thrilling journey filled with new opportunities and exciting challenges.

By implementing model portfolios in their client accounts, firms can streamline their operations, increase efficiency, and effectively scale their business. Model portfolios can allow advisors to have more time for clients while still delivering high returns.

Model portfolios provide a consistent approach to investing for clients, ensuring that each client receives the same level of service and expertise. This not only helps in attracting new clients but also improves client retention rates, as well as encouraging clients to have more of their accounts and assets managed by a firm’s advisors.

How Do Model Portfolios Help Advisors?

Model portfolios provide significant productivity boosts to advisors. Firstly, they save advisors valuable time by streamlining the investment process. With pre-constructed model portfolios, advisors can quickly and efficiently allocate assets without the need to do their own extensive research and analysis.

Secondly, model portfolios allow for customization based on each client’s unique circumstances. Advisors can tailor the model portfolio to align with a client’s specific goals, risk tolerance, and time horizon.

Lastly, model portfolios offer risk management benefits by providing diversification across various asset classes and sectors. This helps mitigate risks associated with individual securities or market fluctuations. Ultimately, these advantages enhance client trust and transparency as advisors can confidently recommend well-structured portfolios that align with a client’s needs and objectives.

Time-saving for advisors

Advisors can save time by utilizing a model portfolio, allowing them to focus on more strategic tasks.

With a model portfolio, advisors have pre-constructed investment strategies that they can use for multiple clients who share similar goals and risk tolerance levels. This eliminates the need for advisors to spend significant time individually constructing portfolios for each client from scratch. Instead, they can tailor a selected model portfolio to fit each client’s specific needs and preferences.

By streamlining this process, advisors can efficiently manage their clients’ investments while also dedicating more time to activities such as relationship building, market research, and staying up-to-date with industry trends. Ultimately, the time-saving aspect of using a model portfolio is crucial for advisors in ensuring their effectiveness and success.

Customization for a client’s circumstances

It’s important that a selected model portfolio can be adjusted to meet client-specific requirements.

Tailoring investment strategies to fit each individual client’s unique circumstances and goals is essential for optimal financial planning success. This is where the concept of a model portfolio becomes important in our industry. A model portfolio is not a one-size-fits-all approach. They give the advisor guidance on implementing each client’s portfolio and provide options for further personalization as needed.

This customization ensures that the investment strategy aligns with each client’s specific needs, is vetted by trusted teams of investment professionals, and ultimately increases the likelihood of clients achieving their financial objectives. Furthermore, these additional customization levers allow advisors to address any potential challenges or limitations that may arise from the client’s circumstances, making it an integral part of effective financial planning.

Risk management benefits

Advisors can help guide a client’s financial future and protect them from potential losses by implementing effective risk management strategies. One important tool in both explaining and achieving this is a model portfolio.

Model portfolios are created with specific risk tolerances in mind. Once an advisor goes through their risk tolerance questionnaire or uses another method to determine their client’s appropriate risk tolerance, the next question is: How do I implement this?

Model portfolios designed by the firm already solve for risk tolerance and diversification. Typically, there are one or two models for every pre-determined asset allocation. Advisors can use the array of firm-provided model portfolios to explain risk to their clients and show them how their money will be managed.

Risk Management & Portfolio Rebalancing with Model Portfolios

Model portfolios help facilitate effective portfolio rebalancing. This process involves periodically adjusting the allocations within a portfolio to maintain the desired allocation set by the model portfolio. By rebalancing regularly and leveraging the model’s guardrails, advisors can ensure that their clients’ portfolios remain aligned with their long-term goals and risk tolerance.

Model portfolios play a crucial role in providing consistent investment solutions to clients across an entire book of business. They offer transparency and clarity by outlining specific investment strategies that cater to individual needs while helping advisors manage more clients than previously possible.

Moreover, they allow financial advisors to efficiently manage client expectations by clearly communicating the potential risks associated with each model portfolio.

Overall, model portfolios serve as an important tool for both investors and industry professionals.

Scalability & Revenue Growth for Firms

To achieve scalability and drive revenue growth for your firm, it’s crucial to focus on two key areas: expanding your client base and optimizing operational efficiency. One effective way to accomplish both is through the use of model portfolios.

Model portfolios are pre-constructed investment strategies that can be replicated across multiple client accounts. By implementing the use of model portfolios, firms can efficiently manage a larger number of clients without sacrificing personalized service. This scalability allows firms to attract more clients and increase their assets under management.

The use of model portfolios also contributes to revenue growth by streamlining the investment process. Instead of manually rebalancing each portfolio, firms can make changes at the model level, which are then applied automatically across all client accounts. This not only saves time but also reduces the risk of errors and allows for the use of asset location.

Furthermore, model portfolios enable firms and their advisors to provide consistent investment strategies to their clients. By developing and maintaining a range of well-diversified models, firms can offer tailored solutions that align with different risk profiles and investment objectives.

Incorporating model portfolios into your firm’s operations enhances scalability by allowing you to efficiently handle a larger client base while optimizing revenue growth through streamlined processes and consistent investment strategies.

Frequently Asked Questions

What are some common challenges that firms face when implementing model portfolios?

Common challenges that firms face when implementing model portfolios include ensuring regulatory compliance, managing client expectations, selecting appropriate investment strategies, and effectively communicating the benefits of model portfolios to clients.

Tax management can be a challenge when transitioning a taxable account from one model portfolio to another model portfolio. This transition must be done carefully and in conjunction with a client’s tolerance for capping the amount of taxes incurred for a given period.

Transitions can also trigger the need for tax harvesting, and it can be challenging to avoid wash sales. Advisors need to offer solutions such as allowing for alternative investments during the wash sale period.

How can model portfolios help advisors streamline their investment management process?

Model portfolios help advisors streamline their investment management process by providing pre-constructed investment strategies. These portfolios offer a range of diversified assets and can be easily customized to meet individual client needs, saving time and effort in portfolio construction and rebalancing.

What role does technology play in the creation and management of model portfolios?

Technology plays a crucial role in the creation and management of model portfolios. It allows for efficient portfolio construction, rebalancing, and tracking. Automation and algorithms help maintain asset allocation, reduce costs, and provide real-time monitoring, benefiting both advisors and clients.

Technology such as LifeYield’s allows advisors to use model portfolios and manage client portfolios at the household level, ensuring asset allocation is on target throughout the client’s entire portfolio while minimizing tax drag and efficiently locating their assets.

Can model portfolios be customized to meet the unique needs and preferences of individual clients?

Yes, model portfolios can be customized to meet the unique needs and preferences of individual clients. Financial advisers can tailor investment strategies based on factors such as risk tolerance, investment goals, and time horizon.


Model portfolios play a crucial role in the financial industry. They provide numerous benefits for firms and advisors, including risk management, personalization, enhanced scalability, increased advisor productivity, and revenue growth.

By utilizing these model portfolios alongside LifeYield’s technology, firms can effectively manage their client’s investments while maximizing returns and generating tax alpha, improving outcomes for all – clients, advisors, and firms.

Walt is the VP of Product Development at LifeYield.