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4 Portfolio Models to Help Advisors Segment Clients

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Whether or not the Labor Department’s fiduciary rule and its full compliance date remain as is, many advisors will be taking on the role of a fiduciary, if they haven’t already, and that has implications for portfolio construction.

(Related: DOL Releases Fiduciary Rule Request for Information)

A fiduciary is focused on “the best outcomes as possible” for his or her clients, which requires that they think about themselves as “a buying agent for their customers,” says Sanjiv Mirchandani, president of Fidelity Clearing & Custody Solutions.

(Related: Fidelity Redefines the Future Value Proposition for Advisors)

“You’re not selling product but a professional buyer constructing the clients’ portfolios,” says Mirchandani in a video on the Fidelity website.

Those portfolios, in turn, will vary depending not only on a client’s age, needs and risk tolerance but also on how much money they have to invest, which is the usual basis for how advisors segment their clients.

Mirchandani recommends that, in light of the fiduciary rule, advisors use fee-based solutions as much as possible, abide by the rule’s impartial product standard (act in the client’s best interest, charge reasonable compensation, avoid misleading statements), wean themselves off of commissioned products, and discourage reps as portfolio managers, which often results in “suboptimal outcomes,” according to available data.

He sees four broad dominant models that advisors can use to match client assets to investments:

  • A robo solution and target date funds for mass-market clients, including millennials, starting to accumulate assets. This will be the lead product to get millennials in the door.”
  • A “Financial Navigator” model for mass affluent clients, providing “episodic advice” that’s “triggered by life events” and “delivered at a reasonable cost, complemented by technology.”
  • A personal CFO/life coach who offers a “full complement of services” including financial planning, full balance sheet advice and interaction with other providers such as estate attorneys and CPAs. The life coach function will integrate behavioral psychology tools and analysis to develop solutions that fit clients’ asset accumulation as well as income and wealth transfer.
  • A family office model to serve ultra-high net worth clients who have a minimum net worth of $15 million to $20 million and multigenerational needs. A multifamily office (MFO) model can “spare UHNW individuals the cost, risk and complexity of setting up their own family offices advisor.”

For these HNW and UNHW clients, Mirchandani recommends unified managed accounts (UMAs), which allow advisors to blend mutual funds, ETFs, separate accounts and securities, and unified managed household (UMH) accounts, which can encompass multiple accounts and individuals. The UMH account has “the potential to become a monster product for the high end,” says Mirchandani.

Mirchandani is not suggesting that all advisors service all the four types of clients with these investment vehicles. “You can’t be all things to all people all the time. Advisors and firms will need to get more specialized to remain competitive.”

As for individual investment categories, Mirchandani suggests that advisors “rethink risk management.” He’s reluctant about real estate investment trusts — they have made a comeback but have a high cost — and hedge funds, also high cost and often underperforming.

He’s intrigued by the idea of integrating insurance products such as whole life insurance or income annuities with stocks and investment products to provide retirement income in a single package. Many firms are considering such strategies, but “these are early days,” says Mirchandani.

He expects the trend toward lower-cost, efficient investments will continue and notes that “this isn’t just about indexing and ETFs [but] generally about high cost vs. low cost and getting the most bang for the buck.”

Factor investing, BlackRock’s adoption of lower-cost quant strategies and clean shares — shares without sales loads or distribution fees — are all examples of this, says Mirchandani.

He expects demand for actively managed mutual funds will return as the investment cycle changes, but primarily for low-cost active with greater active share.

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