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Investing in a model portfolio

It is important to understand how they work.

Model portfolios can be great options for investors who may not understand the investment industry very well and have little idea on which funds to be invested in. But before you invest your hard-earned money into a model portfolio, it is important to understand how a model portfolio works.

What is a model portfolio?

A model portfolio is a combination of managed investment funds that are grouped together to achieve an expected return with a corresponding risk based on extensive research. These model portfolios will blend asset classes, investment managers and investment strategies to achieve diversification.

This will now allow the advisor to manage the exposure you have to all the funds underlying in your investment as a single unit rather than having to look through every single client account to see who has exposure to specific unit trust funds.

The funds within the model portfolio are held by the investor directly and invested via an investment platform but managed and rebalanced by the financial advisor on behalf of the investor.

What is important to take into consideration when you enter an investor into a model portfolio? 

  • A clients’ needs and risk appetite: The advisor will need to ensure they fully understand the investor’s financial goals and objectives as well as their investment risk appetite. Generally, financial advisors offer a variety of model portfolios to address the financial needs and requirements of the investor.
  • Type of investment: This is important to consider as certain investment structures limit the allocation you can have to certain assist classes. Retirement savings-investment is a good example of this as the model portfolio will need to be structured to take into account Regulation 28. Regulation 28 limits the exposure you can have to certain asset classes to avoid overexposure to risky asset classes.

What are the advantages of being in a model portfolio? 

  • Efficient management: The advisory practice will have the ability to manage the investor’s investment accounts more efficiently by implementing changes as soon as possible if market conditions change.
  • Diversification: The model portfolio can be expanded to not only include different asset classes, but also different fund managers which reduces the overall portfolio risk.
  • Tracking performance: It makes the investment advisory firms’ analysis and performance tracking of the underlying unit trust funds simple because the analyst will only be tracking a lower number of funds as most investors will be exposed to the same funds. In addition to this, it allows the analyst to spend more time analysing the fund and thus contributing to the overall performance of the client’s investment.
  • Rebalancing: When or if a fund switch is required a single instruction to a Link Investment Service Platform will be issued by investment advisory practice rather than submitting a switch instruction per client account across the whole client base which makes this process simpler and reduces the probability of fund switches not being effected or being missed.

The disadvantages of being in a model portfolio? 

  • The investor has no control: When you invest in a model portfolio, you lose control of your asset management and the funds you would be invested in. If you feel uncomfortable with providing the financial advisor with the control to manage the portfolio then this would not be the best option for you.
  • Performance: Even though a model portfolio will be carefully managed by the financial advisors that does not mean that it will perform, and the performance of a model is not guaranteed. Even the best fund managers can underperform during volatile market conditions.
  • Costs: There may be additional cost involved with being invested in a model portfolio. With that said one needs to take into consideration that you need to pay fees for the financial advisor’s time to manage your money and for the expertise in ensuring you are invested in the correct funds and asset allocation. 

What are the benefits for you as the advisor to assign your clients to a model portfolio? 

  • Managing: If an advisor can get all their clients invested in a model portfolio structure it is much easier to manage than if clients were all invested in multiple different mixes of funds.
  • Changes: The advisor can act fast if there is something that is underperforming in the model, they can switch out by advising the investment platform to activate the switch within the model.
  • Solution for every client: An advisor can construct a number of model structures to match any client’s needs. Most advisors will have a conservative, moderate and aggressive model portfolio. For example, if your client is averse to risk you can then enter them into the low-risk conservative model.
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Michael Haldane

Global & Local The Investment Experts


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