It is estimated that the number of mutual funds and ETFs may now be more than 30,000 and the number of tracked performance factors and distinguishing features of each may now exceed 300.  The sheer size of that universe, and amount of information about the choices within it, makes trying to identify which ones might be “best” for you, as a client, extraordinarily difficult and time consuming, if not virtually impossible, for investment advisors.   

So, it appears that individual customization of portfolio design and investment choice selection is becoming increasingly rare (unless, of course, you have a lot of money to invest).  Instead, two of the most common ways investment advisory firms are now providing investment advice are the use of “model portfolios” and/or recommending choices from a pre-approved pool of mutual funds / ETFs. 

Use of “model portfolios” is becoming increasingly common, in which “investment advice” involves trying to match clients to model portfolios designed to help achieve their differing investment goals.  For example, it is common to see these “models” labeled in such a way as to reflect the “risk tolerances” of clients, such as “conservative” (for those with little tolerance for risk), to “moderately conservative,” “moderate,” “moderately aggressive,” and “aggressive,” as client tolerance for risk increases.   

Each model offers diversification among (in other words, a blend of) of asset classes designed to help maximize returns for any given amount of risk.  In theory, there is no problem with this.  But, in actual practice, this approach may not add any meaningful value and may not be worth the cost.  Why?   

The answer lies in the work being performed. How difficult is it to do this? In other words, is this something that you, yourself, might be able to do relatively easily and what value did it add?  For example, some firms take the time and go to the effort of designing their own model portfolios, which can be quite specialized in their focus.  On the other hand, some may simply “buy” the models from others.  Here’s a brief story to explain.   

In talking with the owner of one advisory firm, he described their advisory process in this way.  He said, “we use the model portfolios provided by (Company X). We pay a little less than half of 1% for them.”  “So, your advisors are willing to pay nearly ½ of their 1% advisory fee for these models,” I asked.  “Oh, no,” he replied, “that cost is passed along to the client – it’s added to their 1% fee.”  So, for nearly 1.5% per year, his advisors were simply “matching” their clients to one of 6 model portfolios, that neither the advisor nor the firm had designed.   

Did the clients understand this?  Do you think they would have felt that a fee of that size was well earned, if they knew? Likely not, especially if they understood that they could simply go to the website of the company from which these models were obtained and see the asset class blends for each model (including theirs).   

And, since many (if not most) of these models utilize index fund-based ETFs within those asset classes, was any meaningful value being added in investment selection, beyond what the clients themselves could have done (for example in picking a large cap value ETF for the large cap value asset class)?  Again, probably not. 

Are we saying that the use of “model portfolios” is somehow “wrong” or a “rip off?” No, were not saying that at all.  What we are suggesting is that you find out how it’s being done.  Some investment advisors and firms not only take the time and effort to design and periodically adjust their own models, they may also spend the time and effort to try to optimize the investment choices within those models.   

Whether or not those efforts yield hoped for “better than the market” investment results is another question, but at least efforts are being made at a level likely beyond what you would have the time and expertise to do for yourself. 

Recommendations of mutual funds and ETFs from an approved pool is also a quite common practice, in which a comparative analysis (involving both quantitative and qualitative reviews) of mutual funds and ETFs is performed to select those they believe will be “best” to recommend to their clients in each asset class.  This typically takes a lot of time and resources, that may produce the desired “better than index fund” result . . . but maybe not.   

Afterall, “past performance is no guarantee of future results,” and the time and effort involved in monitoring and replacing the choices within the pool, presents another time and resource challenge that may result in retaining poor performers longer than would otherwise be optimal.   

Moreover, the use of such pools likely means that clients could be getting the identical mutual fund and ETF recommendations if they have the same asset classes in their portfolios as other clients . . . a potential “one size” fits all issue.   

What we mean is that, even if two clients have the same asset class in their portfolios, their risk tolerances and goals may be different and one might prefer a more “aggressive” mutual fund in that class (with higher average returns, and with potentially higher risk) while the other might wish the opposite (and a third might prefer something in between).   

So, what’s the answer?  Ideally, the “best” approach would likely be to have an experienced and skilled investment advisor custom-design a portfolio specifically to meet your unique needs, goals, and preferences, and then to optimize the selection of mutual funds / ETFs with the asset classes to try to further optimize the overall investment performance you’re hoping to achieve.   

Are such investment advisory services available?  Yes, but likely not for most clients . . . even clients with $1+ million accounts are often not getting this (and may not realize it).  It’s simply too time consuming and expensive to do for all but the largest accounts. Unfortunately, even this more elaborate approach may not wind up adding meaningful value, in the sense of consistently “beating the market” . . . in other words “beating” the results that could have been obtained through using a similar model portfolio and index fund-based ETFs. 

We believe the “is it adding value” problem lies less with the asset allocation and portfolio design and more with how the investment choices are selected and monitored within client portfolios. Within any particular asset class there is a surprisingly wide range of historical performance, from exceptionally high and consistent average annual returns (even with lower-than-average index volatility) to funds with consistently poor average returns and higher than index volatility.   

In other words, the question of did the advice add value, is most often related to the investment choices made within the portfolio and not to the differences between portfolios.  And this where DTC’s decision-assistance technology is focused. 

To help investment advisors to optimize investment choice selection, DTC has recently introduced its “Professional RapidReview ToolTM” (its “ProRRTTM” which can be found at https://prorrt.com).  With it, much like with RitaSM, investment advisors can score and rank hundreds of funds within each asset class, using weighted blends of performance parameters (48 in the professional version) that can be used to match the needs, goals, and preferences of individual clients or the desired performance for both model portfolios and pools of investment choices. 

The problem is that this powerful “wealthtech” tool has only recently been introduced and is largely unknown within the investment advisor community.   

If your investment advisor has not yet heard about it, please do them and yourself the favor of telling them about it and sending them the link.  In the meantime, you can use RitaSM to check how well your advisor’s mutual fund and ETF recommendations (whether within a model portfolio or recommended from a pool of approved choices or otherwise) fit with your individual needs, goals, and preferences.   

If there are other choices that appear significantly better to you (from your use of RitaSM), you can ask your advisor to consider them and explain why they would not be better for you than the poorer performers you may have.  There may be legitimate (qualitative due diligence-based) reasons, for instance, for not picking #1 in a RitaSM ranking.   

But, even if your advisor has licensed the ProRRTTM, you’d be still well advised to keep and use RitaSM.  Why?  By doing so, you can check to see if he or she are using it to specifically benefit you . . . to optimize the selection of choices that best match what you are seeking to achieve.   

If there is a mutual fund or ETF recommendation that doesn’t seem to make sense to you, you’ll be able to have a much better informed and more productive discussion about that recommendation.  And, knowing that a client has RitaSM, could likely make investment advisors much more careful about what they are recommending and why.