How to build model portfolios

By Craig White and Grant White | September 15, 2015 | Last updated on September 21, 2023
3 min read

One of the biggest challenges for new advisors is determining how they’re going to invest their clients’ money. And while picking investments for one client isn’t that hard, picking investments for 500 clients can be near impossible if you don’t have the right structures in place. That’s where model portfolios come in.

Ideally, you will create between one and five model portfolios that can be used in virtually all client situations. We wouldn’t recommend having more than five models because they can become too complicated to manage, defeating the purpose of having the model portfolios in the first place.

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We have three model portfolios that can be used for all of our clients. Each model is based on an investment philosophy: conservative, balanced or growth.

When we meet with a client, we rarely discuss the individual securities that make up the portfolio. Even if a client is knowledgeable, she’ll get bored with a line-by-line examination of each position. Instead, we focus on the overarching philosophy that makes up her portfolio. Clients are more responsive to a discussion on the philosophy, rather than the individual securities themselves. For example, we talk about our commitment to using a value approach to investing and only buying stocks or funds that fit into that mould. We usually like to tell stories to illustrate the point, as they are more interesting than talking about numbers.

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Focusing on one of our three philosophies makes it easier to manage the portfolio because we know the basic components that make up the portfolio. Then, it’s a simple matter of selecting a security or fund that best fits into that philosophy. For instance, since we are biased towards a value style of management, one component of the portfolio is Canadian equity. So we’d select one or two funds that are managed by value managers and invest exclusively in Canadian equities. If one of the securities underperforms, it’s a simple matter of plugging in another fund.

Also, using model portfolios helps us deliver the best returns for clients because we’ll stick with the portfolio whether the market is up or down. Often, if your portfolio loses money you may want to sell stocks when you should’ve stuck with your original strategy. A model makes it easier to reject the urge to act without thinking. This has definitely helped during the market volatility in recent months.

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Here are some more tips when building your portfolios.

  • Make sure that each security you select is liquid enough to allow you to buy a lot of it. You should assume that your business is going to grow, and it does no good to put an illiquid small-cap stock in your model.
  • Any new advisor should work towards becoming a portfolio manager and putting clients into discretionary management accounts. This allows for greater efficiency than having to communicate with clients on every trade, even if you have a model portfolio.

Building model portfolios is a must-do for every advisor who wants to grow business. The earlier you set them up, the faster you will grow.

Craig White and Grant White

Craig White and Grant White are investment advisors at Craig & Grant White Family Wealth Management Group, National Bank Financial.