Four Key Considerations For Financial Advisors Using Model Portfolios

Model Portfolios Can Add Value When Advisors Incorporate The Client’s Priorities, Build ‘Sleeves’ For Flexibility, Back-Test Performance, And Customize With A Mix Of Short-Term And Long-Term Models

In recent years, model portfolios have increasingly gained traction within the financial advice industry, emerging as a compelling solution for wealth managers.

The estimated value of assets under management (AUM) in model portfolios reached a substantial $3 trillion in 2020. This growth can be attributed, in part, to the affordability of exchange-traded funds (ETFs) and the continued trend toward comprehensive financial planning strategies.

Outsourcing portfolio construction

Cerulli research confirms this trend, noting that third-party model portfolio utilization is on the rise, with 13% of advisors outsourcing client portfolios and 26% indicating they’ll modify them to meet firm or client preferences. The rise in usage can be attributed to several factors that reflect the evolving needs of both advisors and clients alike.

For advisors, outsourcing portfolio construction offloads time spent on investment management, giving them more hours to spend on financial planning with clients or for prospecting to scale their practice. Customized models can also expand advisors’ service offerings into other asset classes such as gold or private market investments.

On the client side, model portfolios offer transparency into their underlying holdings, fostering a stronger sense of trust between the advisor and the investor. Additionally, as clients become more informed and engaged, the advisor-client relationship deepens, enhancing the potential for long-term collaboration and referral business.

With advisors increasingly turning to customized model portfolios to personalize and enhance the client experience, let’s examine four critical elements.

Listen To The Client

The creation of customized model portfolios takes into account the unique considerations of each individual client, alongside a careful examination of macro data. This approach informs the decision-making process during portfolio construction, ensuring it is precisely tailored to meet the client’s requirements. A skilled financial advisor can adeptly pull the necessary levers to ensure the model accurately reflects the client’s investment philosophy and risk appetite.

Rather than merely imposing their expertise, advisors should prioritize actively listening to their clients’ desires and recognizing the importance they attach to specific assets. This could manifest in various ways, such as the portfolio avoiding investments in fossil fuels. Through open and honest conversations, advisors can clarify the realistic outcomes and potential variances clients may encounter.

Benefits Of “Sleeve” Building

Advisors’ rising frustration with their existing investment management options, coupled with their inclination to completely delegate this responsibility, has led many to opt for customized, third-party model portfolios. A growing number of forward-thinking advisors outsource portfolio management as a remedy to save time, enhance client satisfaction and bolster their revenue as a result. The rise of customization has emerged as a critical aspect of this trend, with sleeves offering further flexibility, reflecting the philosophy of the practice and/or unique client needs.

Interchangeable sleeves empower advisors to offer customized investment models that reflect core philosophies and key exposures that they consider critical. Advisors can differentiate themselves from peers, leveraging portfolio elements such as private market investments or dividend biases, which are often overlooked in off-the-shelf or “cookie cutter” models. Further, they have the flexibility to selectively enable or disable sleeves in their models based on market conditions or client preferences, allowing for a higher degree of personalization and instilling greater confidence in their decisions.


The significance of back-testing a customized model portfolio cannot be overstated since it serves as the backbone for designing a model’s behavior relative to the market. Just as sleeving is pivotal for enhanced customization, back-testing helps to understand what was normal or abnormal over a designated period. Through rigorous testing, advisors can gain invaluable insights, revealing the strengths and weaknesses of each model.

Back-testing fosters intellectual honesty by transparently revealing how the model would have performed in various market scenarios, including challenging times like recessions. By extending the testing period to encompass multiple recessionary environments, advisors can set reasonable expectations for themselves and their clients, solidifying their position as reliable and forward-thinking financial guides.


Rather than pursuing the ever-elusive perfect model, the key to customization and sleeving is to build an array of models, each tailored to meet specific client needs. These bespoke models act as specialized tools versus an off-the-shelf, one-size-fits-all approach. With a mix of short-term and long-term models, the portfolio becomes a comprehensive toolkit, ready to adapt to various market conditions.

Navigating uncertain markets

When markets are thriving, the advisor can confidently capture more alpha within the client’s risk tolerance, then throttle back during market downturns. Diverse models ensure a realistic investment experience, resulting in a more resilient approach and potentially better financial outcomes for clients. The aggregation of custom models creates a powerful whole, where all of the pieces can come together to navigate uncertain markets more effectively.

This approach ensures a client-centric experience, where their distinctive preferences and risk appetites are attentively addressed. By following these steps, advisors mitigate the reliance on guesswork and reduce the risks of concentrating investments in a single strategy, bolstering client retention and satisfaction.


Advisors seeking to harness the potential of customized model portfolios can embrace the power of tailor-made solutions to elevate their advisory practice, provide exceptional client experiences and continue navigating a dynamic financial landscape with confidence. By adopting customized model portfolios, advisors can deepen client relationships while propelling clients towards financial success.

Chris Shuba is the CEO & Founder of Helios Quantitative Research.

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