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Model Portfolios—Are They Right For You?

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Looking for an investing service to manage your investments for you? If you are in the process of selecting an investment manager, the proliferation of providers requires careful navigation.

Assets in model portfolios have been rising fast in recent years, reflecting many investment managers’ and advisers’ growing interest in seeking quick and convenient ways to invest clients’ money. At the end of the day, who do these pre-built investment portfolios really benefit?

In this comprehensive yet easy-to-follow guide, we illustrate what a model portfolio is by using an everyday analogy, and take you “behind industry scenes” to understand their surge in popularity, so that you can understand what they really are before signing investment management documents for your advised investment solution.

Understanding Model Portfolios Through An Analogy

Model portfolios are ready-made portfolios delivered to everyday investors, and choosing a model portfolio solution can be compared to buying a pre-baked pie at the grocery store or buying a pre-built personal computer (PC) at your local retailer.

Let’s use the PC example.

When you shop for a new PC, you’d choose one that is most compatible with how you’d want to use it. You generally have three choices: there are pre-built PCs (model portfolios), custom-build PCs (customized investment portfolios), and PCs that you can build yourself (personal investment accounts).

Pre-built PCs are put together by well-known manufacturers (in this case, analogous to large banks) and in quantity. These are easily accessible through retailers (advisers), who will recommend the one most appropriate for you from available store offerings. 

On the other hand, you can have someone build your PC for you (in this case, analogous to investing through an investment manager). You can select the features and components you want and rely on a professional expert (investment manager) to build it to your specifications.

Of course, some people choose to build their own PC’s (analogous to using personal trading platforms such as Questrade or Wealthsimple Trade).

To sum up the analogy, the most important factors to think about when buying your PC are the components inside the hardware and whether or not the finished product is complex enough to meet your needs—and the same goes for selecting your investment manager.

We hope this analogy helps explain what model portfolios are. Now let’s look into why some investment managers choose to use model portfolios rather than provide clients with customized investment portfolios.

A Surge In Model Portfolios

Let’s put on our business hats for a moment—why don’t all investment managers build client portfolios from scratch?

The implication is that the investment manager will have to spend a lot of time on traditional “investment management”—building and rebalancing portfolios and executing trades for each client in their book of business. This level of personal attention takes time—time which could otherwise be spent on business scalability and prospecting activities to grow the manager’s business and fee revenues.

Model portfolios are targeted to a broader group of investors, since they lack customization—a “one size fits all” approach. So from a firm brand and business growth perspective, using them allows the manager to spend less time on stock selection and more time on client experience, which is an industry-wide focus.

However, there are investment managers who realize that many clients need customized investment solutions­, whether due to the complexity of their needs, their specific investment goals, or one of a host of other reasons. These managers offer personalized, results-focused solutions, taking each client’s specific circumstances into consideration.

The Bottom Line

The decision between opting for a pre-built model portfolio or seeking a custom-built personalized portfolio comes down to the complexity of your financial situation. We’d like to highlight that each client’s financial situation is unique—and your investment portfolio should be too.

Fortunately, not all investment counsellors, managers and advisers are on board with using model portfolios for their clients and many truly perform the functions their titles imply. At Bloom Investment Counsel, Inc., our personalized investment portfolios are constructed to meet each client’s unique goals—no two portfolios are identical.

Preserve And Build Your Wealth With Bloom

As automated forms of investment management services become available, personal investment management may be done autonomously through an investment platform. Alternatively, a professional investment manager can help you and your family preserve and grow wealth without risking future security and legacy goals. The answers to you and your family’s most complex financial questions come when you connect with real people.

At Bloom Investment Counsel, Inc., you and your family’s financial situation is private, personal and unique—and so is your investment portfolio. Visit Bloom’s website to learn more about our investment approach or get in touch with Bloom to find out what we can do to help you and your family protect and build wealth.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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