[Part 1] The Benefits of Bionic: What are the Pitfalls of Implementing a Model Portfolio Strategy?

The Model Portfolio concept is now well understood and has become the method of choice for many intermediaries to access full time, professional discretionary investment advice on behalf of their clients. The end product is generally an off-the-shelf, low cost, multi-asset approach to investment management providing a series of required risk bands offering “peace of mind” to “high return potential”. But this strategy comes with many pitfalls.

The problem with this strategy is that clients become indexed into a narrow selection of prefabricated portfolios – usually arrived at by a series of decision trees. The commoditisation of clients means that investment portfolios lack individuality, they receive a below par service and the products might not be suitable for their multifarious lives.

As people age and accumulate wealth, their finances inevitably become more complex - there are a myriad of complex factors to consider. At that point, people highly value working with a financial advisor who can put together an appropriate financial plan. Here and now, it it still impossible for a computer algorithm to take into account the multitude of possible individual situations in someone’s lives and create a plan in a way that engenders trust. Moreover, many people simply do not want to be a 2nd class investor and desire the same personalised service provided to those higher up the wealth spectrum.

With model portfolios, financial advisers essentially become product pushers, have fewer touch points (if any) with their clients and lose much of their perceived value. This can create an environment of dissatisfaction and lead to both pushback against the business model, and has seen a number of advisers changing shop as a result.

Furthermore, corralling clients into mass market solutions has also eroded the pricing power amongst those that are offering them. As such, financial institutions can only really compete on cost, creating a race to the bottom to attract and retain clients offered lower levies elsewhere. There is little differentiation in terms of service and there is a lack of brand differentiation amongst the key players – essentially, they all do the same thing.

There is, of course, a solution. In the next instalments of this series we will demonstrate how adopting a bionic strategy that merges the speed and accuracy of machines with human empathy, intelligence, critical thinking can change the inner workings of your business, reduce costs and regulatory risk, enhance your clients’ experience and your brand, drive distribution, and increase revenue.

James Lindsay

Director, Business Development

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