The Case for Implementing Investment Models

Estimated Time to Read: 3 minutes

As an RIA, you understand that every decision you make has a direct impact on your clients, your business, and your firm’s long-term success. One area where many firms can gain a significant advantage is by implementing investment models. Whether used across your entire book of business, or within a segment (i.e. as a "small" account solution or for family members within a larger household), these models provide structure, scalability, and consistency—key benefits that not only enhance your investment process but also position your firm for long-term growth and success.

Here’s a deep dive into why using investment models should be considered a best practice for your RIA and how they can add value across different facets of your business.

1. Scale: Efficient Growth as Your Firm Expands

One of the key reasons you started an independent RIA is to grow (your way). As your firm grows, so does the number of households and accounts, and in turn, so does the number of employees needed to support them.

A well-structured model ensures that each client's portfolio remains aligned with your firm's investment philosophy while reducing operational burden on your team. As your firm scales, you won’t have to worry about increased administrative tasks or the inefficiencies of managing bespoke portfolios for each client.

2. Consistency: Across Your Team and Your Client Experience

Investment models also foster consistency, ensuring that every client’s portfolio reflects your firm's core investment strategy, regardless of which advisor manages the relationship. This is particularly beneficial if you have a growing team of advisors or are looking to hire new talent. When each advisor adheres to the same model portfolios, investment philosophy and process, it reduces the variability of investment decisions and creates a uniform client experience. Reporting, trading and communication in turn becomes more streamlined.

3. Enhancing the Value of Your RIA      

From a valuation perspective, firms that have scalable, consistent processes in place—like using investment models—are inherently more attractive to potential buyers. Investment models demonstrate that your firm is not reliant on any single advisor’s judgment but instead is built around a repeatable, sustainable process. This boosts your firm’s valuation.    

A solid succession plan is critical for any successful RIA, and investment models can play a pivotal role in making that transition seamless. When your firm uses standardized models, it creates operational continuity, which is essential if you plan to transition the business to a new generation of advisors or to an outside buyer.

 Types of Investment Models: Which Approach Is Right for Your RIA?

Investment models are not one-size-fits-all, and different approaches work for different firms based on their client base and investment philosophy. Here are some common types of models that RIAs might consider:

• Strategic Asset Allocation Models: These models are based on long-term asset allocation strategies, focusing on diversification and aligning with clients' risk tolerance and goals. They are relatively passive and require minimal changes once established.
• Tactical Asset Allocation Models: For firms that prefer a more active approach, tactical models allow for adjustments based on market conditions. These models provide flexibility to capitalize on short-term opportunities while maintaining an overall asset allocation framework.
• Factor-Based Models: These models focus on specific factors, such as value, growth, or momentum, and build portfolios around these attributes. Factor-based investing is often appealing to advisors looking to add an academic or quantitative dimension to their strategies.
• Income-Focused Models: These models are tailored to clients who prioritize income, often relying on a mix of dividend-paying stocks, bonds, and other income-generating assets. RIAs with a significant retiree client base may find these models particularly useful.
• ESG Models: Environmental, social, and governance (ESG) investing has gained considerable traction. ESG models allow advisors to cater to clients who wish to align their portfolios with their values while pursuing competitive financial returns.

Conclusion

For RIAs, implementing investment models is not just about simplifying portfolio management. It’s about creating a foundation for scalability, consistency, and client satisfaction, while also positioning your firm for future growth and succession.

By incorporating investment models into your practice, you're not only making life easier for your advisors and clients—you're building a more valuable and sustainable business.