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Each Wealth Advisor and Portfolio Manager have their own approach to investing. Various types of investments can include stocks, bonds, mutual funds, exchange-traded funds (ETFs), options, annuities, alternative investments, futures, and insurance. Some Wealth Advisors and Portfolio Managers may recommend structured products, such as mutual funds, to their clients, whereas some will recommend ETFs. Others may recommend directly holding individual equities and/or bonds. Some may like to use alternative investments, or other complex products. With so many different investment options available today, there are any number of combinations and permutations in constructing a portfolio, depending on the approach your Wealth Advisor or Portfolio Manager takes.

The approach your Wealth Advisor or Portfolio Manager takes is often dictated by their licensing. As a Portfolio Manager, we have the ability to execute trades on behalf of our clients as set out in the client’s customized Investment Policy Statement (IPS). By comparison, a Wealth Advisor must verbally confirm each trade prior to executing it. If a Wealth Advisor is trying to exit out of one equity holding and purchase another with the proceeds, it might take weeks to finally get a hold of each client, where a Portfolio Manager could execute a block switch trade in a matter of minutes.

To become a Portfolio Manager, you must complete further courses and training on top of those required to become a Wealth Advisor. You must also have a clean compliance record, and meet additional criteria with regards to years of experience, amount of assets under management, etc. There is also ongoing supervision and regulatory oversight that a Wealth Advisor would not have.

Model portfolio approach

A model portfolio is a basket of holdings – cash, fixed income, and equities – that an advisor combines to achieve an investment objective or risk tolerance level. Not every Wealth Advisor or Portfolio Manager uses a model portfolio approach; however, from our experience as a Portfolio Manager, we choose to offer discretionary model portfolios to our clients.

Model portfolios can also be offered by a Wealth Advisor; however, they are more difficult to maintain. As mentioned above, if a Wealth Advisor wants to sell a security, they must first verbally confirm the details with each client. That trade then needs to be entered in the system before the next client can be called. Each client receives a different fill price, and it can take a great deal of time to contact every client. For example, some clients may be on holiday and unreachable. The result of this is some clients will have slightly different holdings rather than a uniform model portfolio.

The Portfolio Managers that manage model portfolios will often have more than one model portfolio to reflect the appropriate investment objectives and risk tolerance of each person. Objectives are usually classified as income, growth and speculative trading. These three used to be referred to as income, long-term growth, and short-term growth, respectively. Risk tolerance may be as simple as low, medium and high. Investment objectives and risk tolerance help establish which model portfolio is most suitable.

Our model portfolio approach includes three different broad options – growth, moderate growth, and balanced growth. The best way to illustrate this is to use the situations of four individuals. Tim, Nancy, Jane and John each have $1,000,000 to invest and fall into a different model portfolio. The chart below summarizes the asset mix and number of equity holdings within each model.

Growth examples

Tim recently received an insurance payout of $1,000,000 from an accident he was in two years ago. He is 50 and planning to work for the next 10 to 15 years. It was apparent the growth model portfolio was most suitable. Given that Tim was comfortable with assuming risk, his portfolio would have zero per cent in fixed income and 100 per cent in equities. The number of individual companies Tim would own is 32 and the targeted position size is $31,250 per company. These would be large companies that have both growth and income components. Tim did not require immediate income, so we set up the dividend reinvestment plan on the equities he will be holding longer-term.

Nancy sold her shares in a private technology company and netted $1,000,000 after tax. She’s 40 and looking for tax-efficient growth and is comfortable assuming more risk to achieve greater long-term rewards. The growth portfolio is the most suitable for Nancy with zero per cent in fixed income and 100 per cent in equities. The number of individual companies Nancy would own is 32 and the targeted position size is $31,250 per company.

Moderate growth examples

Jane is 60, recently retired, and withdrew the commuted value from her pension plan, valued at $750,000, and has portfolio investments of $250,000. In listening to Jane’s investment objectives and risk tolerance, it was clear the moderate growth model portfolio was the most appropriate for her needs. She has some experience with investing in the stock market and given the medium-term outlook is comfortable holding a lower percentage in fixed income. She also wanted to withdraw a modest monthly amount from the account to live on. The moderate growth model portfolio would have an optimal asset mix of 20 per cent fixed income and 80 per cent equities, and Jane’s cash flow for the next 12 to 24 months would be set aside in a cash equivalent. The fixed income component would have a short-term duration. Within the equity portion, the number of individual companies Jane would acquire is 30 and the targeted position size is $26,667 per company. These 30 equities would all be large blue-chip equities, diversified by sector, the majority having both growth expectations (capital gains) and pay dividend income. We were able to give Jane an estimated income report for the moderate growth model portfolio along with a discussion regarding risk and reward.

John is 65 and recently received an inheritance of $1,000,000. He is still working, but after receiving the inheritance he is now looking to retire in the next year. While his work pension will cover the vast majority of his expenses in retirement, John anticipates requiring a small amount monthly to supplement his pension cash flow, which will begin after he has retired. We discussed his investment objectives and risk tolerance. As John is new to investing and will shortly require a small amount each month, John would like to invest in the moderate growth model portfolio with an optimal asset mix of 20 per cent fixed income and 80 per cent equities. Similar to Jane above, John’s cash flow needs for the next 12 to 24 months will be earmarked in a cash equivalent. The fixed income component of the portfolio will also be short-term in duration. For the equity component, John will hold the same 30 large blue-chip equities that Jane holds.

Balanced growth example

Interest rates are at historic lows. Risk exists with fixed income investing when interest rates begin rising. Historically, we would have a percentage of our clients that wished to have the balanced growth asset allocation. Today, very few of our clients have the balanced growth mandate. We are also not recommending this allocation at this time. As a result, we have not provided an example of the balanced growth model portfolio. Once interest rates have reached higher levels, and the yield curve has normalized, we may once again advise this model in the future. The way we explain to clients when the time is right to increase fixed income is when we reach an environment where there is an equal probability of central banks keeping interest rates level, cutting rates, or raising rates.

Model portfolios help new clients understand the total investment costs, income, sector weighting, and structure like the number of holdings and position size. Without these models it can be difficult for new investors to visualize how their money can work best for them. The ranges shown above are important as it allows customization for each client.

If an investor wishes to invest in something that is not within the model portfolio, it is still possible. We establish ranges outside of the optimal position size. For example, if a person transfers in a large position from an employer they may purposely want to overweight that name and have a greater position size than the optimal amount. Another example is a person who has large gains on some stocks and wishes to continue overweighting them to defer the income tax payable on them.

Some investors may wish to purchase investments that are not within a model portfolio. The ranges above usually provide flexibility to do this. A person may phone us for an unsolicited trade to purchase small companies or emerging markets which may not be part of any model. Or a person chooses to overweight a particular sector which can also increase the risk of a portfolio. These departures from the model portfolio are all documented within the Investment Policy Statement.

Models help set the parameters for the portfolio within reasonable ranges while still allowing customization for each client. It assists an advisor in establishing a methodology to manage and explain risk and reward. By comparing all three models, new clients can work with advisors to select the portfolio they feel best reflects their wishes.

Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC. Call 250.389.2138, email [email protected], or visit .