How To Turbocharge Model Portfolios

Janeesa Hollingshead, Contributing Editor, Wealth Solutions Report

Kwanti Executive Explains The Benefits Of Model Portfolios, Replacement Assets, Calculating Performance After Historical Changes And Surfacing Hidden Costs

On the first weekend in July, Chicago residents were treated to a NASCAR street race by the shores of Lake Michigan. Those who witnessed these thundering vehicles in action can attest that not only have the cars been optimized, but every tool and activity around them – including incredibly quick pit stops, communications with spotters and more – is fine tuned for performance.

In wealth management there’s also a constant push to optimize performance, and for many advisors, model portfolios are an instrument for that optimization. Some choose to tweak model portfolios further with enhancements to free up time, improve client comprehension and fine tune the portfolio itself to meet client goals.

To understand this process, we spoke with Josh Schwaber, Head of Customer Experience at Kwanti, which serves financial advisors and investment managers with portfolio analytics, investment performance data, stress testing, proposals and a model marketplace.

Schwaber describes the benefits of model portfolios, replacing assets in a portfolio, including historical portfolio changes in performance calculations and identifying hidden costs such as tax drag.

WSR: How can a model marketplace and model portfolios benefit advisors and add to their value proposition?

Josh Schwaber, Head of Customer Experience, Kwanti

Schwaber: Advisors must build a business focused on delivering personal advice that touches on all aspects of clients’ financial lives – not just personal investment recommendations. More than achieving the highest possible returns, investors are primarily concerned with reaching their goals and working with an advisor they trust to help them make the right decisions.

The misalignment between advisor and client priorities is evident in how advisors choose to spend their time. Rather than spending more time working closely with clients, advisors report focusing much of their efforts on portfolio management.

Model portfolios free up time to focus on what clients value most: exceptional service, financial advice and strong relationships. Not only do model portfolios foster relationships, they offer consistent analytics, improve reliability and consistency in performance, and provide blended strategies to improve customization.

Model marketplaces allow advisors to leverage industry-leading strategists together in one place so advisors can do their research, decide and move on with the real work of assigning a model to a specific client account.

WSR: How can screening and searching for replacement assets improve a model portfolio?

Schwaber: While model portfolios allow advisors to free up time on portfolio management and instead focus more on client relationships, portfolio construction and management are still invaluable components of an advisor’s job. But at its core, the job of an advisor is to provide financial advice and help clients reach their financial and life goals. This involves some level of customization. Using models does not have to mean losing customization – it can simply be a more efficient way of providing a customized approach.

Screening and searching for replacement assets can improve a model portfolio by allowing advisors to customize their client’s portfolio based on their risk profile, time frame and more. Platforms that give advisors the ability to screen for best performing assets and find the right investment opportunities for clients not only allow advisors to improve and customize portfolios, but also saves them time in the process.

WSR: How can seeing a model portfolio’s history of changes help advisors achieve a more realistic performance calculation?

Schwaber: Having the ability to see a model portfolio’s history of changes is very important when making proposals to prospects and clients. If you’ve applied tactical changes to a model portfolio, or if the portfolio was rebalanced multiple times, the performance shown should reflect these changes. This ensures that the performance calculation aligns with the specific changes made, giving a more accurate representation of how the portfolio has performed over time.

Furthermore, having a comprehensive view of the portfolio’s history and how it has navigated market fluctuations can help alleviate investor concerns. It provides a broader perspective on the portfolio’s performance by going beyond what can be shown without the historical changes made to a model. This, in turn, can reassure investors to stay invested for the long run and avoid making impulsive decisions based on short-term market movements.

WSR: Why is it so important for advisors to be able to identify tax drag and hidden portfolio costs, and how can they do so?

Schwaber: Investing involves many hidden costs that reduce returns. It’s important for advisors to not only identify these costs in portfolios but also demonstrate and explain them in a way clients can understand. One cost that is more straightforward is the expense ratio for funds held in a portfolio. Funds with high expense ratios drag down returns.

Tax efficiency is more difficult to analyze. One way of measuring this is by looking at the tax drag, which can be defined as the reduction of a portfolio’s annualized return due to taxes – in other words, the tax liability triggered by distributions and capital gains.

Tax drag can have a significant effect on overall performance, and tax-efficient investing techniques are important for recognizing capital gains, transferring wealth and estate planning. Showing clients the impact of taxes between different investments can help them understand the importance of tax planning when investing. By reducing tax liability, the money saved stays invested and compounds over time.

Reducing investment costs and tax drag starts with identifying these hidden costs, which portfolio analytics solutions can help identify and visualize.

Janeesa Hollingshead, Contributing Editor at Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com.

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