David McNatt, senior vice president of product strategy and management at AssetMark, says his firm’s focus is on “enhanced personalization” of model portfolios tailored precisely to the individual end client. The portfolios take into account tax issues and address the client’s investor preferences, such as environmental, social and governance, or ESG, investing.
Ken Van Leeuwen, managing director and founder of Van Leeuwen & Company, a Princeton, N.J.-based boutique financial counseling and wealth management firm, likes both approaches. “Tax efficiency is a big point of interest in these types of models. Some of them do a good job managing taxes, and some do not,” he says. “And with the emergence of ESG investing, it would be nice to see more models focused on that area of the market. More niche models would be a good addition to the lineup. There are plenty of large-cap U.S., international and emerging markets models, but not many niche markets.”
“A single model that uses traditional asset allocation is a nice starting point, but at the end of the day it really is just a starting point,” McNatt says. “In today’s market it is incredibly important to factor in strategy diversification and build more sophisticated solutions that really help the client achieve their goals.”
For example, his firm recently launched Savos Personal Portfolios, which provide personalized features that can be tailored to high-net-worth clients’ specific personal needs, including individual stock selection, automatic rebalancing across allocations and tax-loss harvesting.
But how do you track performance when the portfolio is so personalized? What benchmark do you use?
“As part of our due diligence process, we are certainly monitoring the performance of the investment strategies over a full market cycle,” McNatt says. “However, we help advisors build portfolios that help their clients achieve a goal, so we are less focused on where their portfolio is performing at a given point in time. At the end of the day the real benchmark is, ‘Are we on track to meet the client’s goal?’ That’s really how we think about it.
“It’s so easy to get hung up on what’s happening today, but the real value is to build intelligently constructed portfolios that help clients achieve their goals,” he says. “One of the things we are focused on is helping advisors build better portfolios that will help them build stronger engagement with their clients, help them more consistently deliver on their goals, and give the advisor more time to build deeper relationships.”
Fidelity Investments is a relative newcomer to the model portfolio business, having rolled out its first portfolios in July 2018. It now offers 21 unique investment strategies that include a blend of active and passive funds, proprietary Fidelity products and third-party products.
Matt Goulet, Fidelity’s senior vice president of portfolio solutions, says the fund giant is also focused on “increased personalization” of model portfolios, not prepackaged models.
“The majority of the work we are doing today is starting with the target 60/40 allocation portfolio and tweaking that based on the broker-dealer’s home office expectations or the individual advisor,” he says. “We talk to financial advisors every day. We run customization and personalization requests through our portfolio construction guidance group and make tweaks to our core models. We use a quantitative approach, which is scalable.”