The notion of putting retail investors in cookie-cutter mass-produced standardized buckets of allocations, referred to as model portfolios, is a remnant of antiquated ‘90s thinking. In 2017, it is akin to paying a doctor expensive fees for an over-the-counter pain medicine prescription.
Departing from model portfolios has potential to foster greater transparency. It raises the quality of discourse an advisor has with her client. It encourages a conversation not on historical, but around forward looking risk- return expectations, probabilities of loss or those of exceeding a target. It brings nuance in investment decision making, conspicuous by absence in model portfolios.
Rather than persist with the historical notion of putting clients in coarse model portfolios, a far better approach is to begin by analyzing the forward-looking statistical properties and expected behavior of a client’s existing portfolio. This helps an advisor recommend the best combination of asset sub-types that improve existing allocations on a variety of chosen metrics.
Bespoke allocation goes far beyond conventional passive risk and return tradeoff found in model portfolios. It personalizes for unique investor preferences including accommodating a desire or aversion to alternative investments, expressing preferences for desired levels of illiquidity, considering different investing horizons, incorporating time varying risk preferences as well imposing constraints on specific asset classes to reflect unique investor circumstances.
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