Four steps to streamline client portfolios

A streamlined approach to managing your clients' portfolios can help you grow your practice and provide the clarity and context your clients need to invest with confidence.

BlackRock’s four-step process can help

Through our analysis of thousands of portfolios, we have found that the processes of the best advisors and institutions we work with have four distinct steps:
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Benchmark
Tie the client’s goals and risk tolerance to the portfolio’s mix of asset classes.
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Budget
Identify the appropriate level of risk and cost to help your clients pursue their objectives.
Currency
Invest
Select the vehicles that offer the most efficient pursuit of returns based on your choices in the Budget step.
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Monitor
Evaluate whether portfolio changes are needed based on recent performance and current client objectives.

Build better portfolios

Similar to building a house, constructing a solid portfolio includes many elements that must work in unison. Our four-step process can help you get started.

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Define and refine your investment approach to better balance meeting the needs of your clients with those of your business.
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Benchmark

At its core, a benchmark aligns client objectives and risk tolerance to the risk and return characteristics of the portfolio. It is the North Star that can help you establish an initial risk level, determine asset allocation drift and quantify performance attribution. Additionally, it should provide clients a clearly understood reference for how their portfolio performs over time.

Set the right benchmark

The advisors we work with generally use one of four types. Some are better than others.
Globe
Broad
Represents the entire investable universe (e.g., global stocks and bonds) weighted based on risk tolerance. However, it may be impractical or inaccurate to implement.
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Strategic
Represents a neutral or long-term asset allocation and effectively evaluates impacts of tilts away from it. BlackRock’s preferred benchmark type.
Break through
Granular
Maps the portfolio’s current asset allocation. Good for measuring manager alpha, using a granular benchmark alone does not provide a North Star for risk and return evaluation.
Target
Objective-driven
Tied to a goal (e.g., income, absolute return) instead of asset allocation. While simple for a client to understand, it is hard to determine if proper risk was taken.

Budget

Once you establish a baseline for risk and return expectations, you should create a risk and cost budget to determine how the portfolio will deviate from the benchmark to achieve the client’s objectives.

Risk budgeting

A portfolio without risk won’t be able to generate any real returns. But all risk is not equal. To build the best portfolios, you need to understand what kinds of risks present the best opportunities for return as well as how much risk to take given the client’s objectives and risk tolerance.
Macro risk (index)
Structural risk, such as policy decisions or economic factors, that is difficult to diversify away. This drives the performance differences between asset classes.
Style risk (factors)
Risks that explain the out- or underperformance of securities within asset classes. Examples include value, momentum, quality and size.
Active risk (alpha-seeking)
Manager skill at timing macro and style factors, determining asset allocation and selecting securities.
The whole is less than the parts
It is vital to consider the risk of investments within the context of the whole portfolio. Adding investments with a low or negative correlation can help diversify a portfolio and potentially reduce overall risk, even if they are individually risky.
The whole is less than the parts

Implement a risk budget

Identify risk level of benchmark
Establish portfolio risk level vs. benchmark
Select asset class, factor and strategy exposures
Seek to maximize potential return within risk budget

Invest

Now that you have set your benchmark and your portfolio parameters around risk and cost, it's time to invest. But what do you actually buy? The two most important things to consider are vehicles and managers. As you select investments, be sure to check back to ensure alignment to your risk and cost budgets.

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Mutual funds
Traditional pooled investments which offer daily liquidity and shared capital gains.
ETFs
ETFs
Gain desired exposures with strong liquidity and tax efficiency.
Diversification
SMAs
Client owns all underlying securities which provides greater opportunity for customization and tax management.
Government institute
Private/illiquid structures
Use these alternative to tap into hard-to-access segments of the market.
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Analyze the factors in your portfolio
Use our 360 Evaluator tool to identify the factors driving risk and return in your portfolio.
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Explore model portfolios
Streamline your investment process with a model as your base. Then, customize it with your unique view.
Think beyond 60/40
Think beyond 60/40
With stocks at all-time highs and bond yields at sustained lows, consider incorporating alternative and unconstrained investments into your traditional 60/40 portfolio.

Monitor

It’s critical to regularly check in on the alignment of the portfolio’s progress and your clients’ goals, and make sure that the portfolio remains on track to meet their goals as planned.

Be prepared for life events

Life happens – and some of these changes can, and should, impact your clients' portfolio allocation:
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Retirement time horizon
Clients may need to retire a few years early or decide to work longer than anticipated.
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Assets
Unforeseen financial obligations may reduce investable assets. Conversely, an inheritance or selling a business can increase investable assets.
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Family obligations
Life events such as the birth of a child, divorce, loss of a spouse or caring for an elderly parent could change a client’s financial situation.

Implement a defined portfolio review process

A disciplined monitoring process can create predictability in your practice, providing clients the confidence they need. We recommend you review the following six items:
Performance
Strong performance results from good processes. Evaluate track record, yield and upside/downside capture.
Asset allocation
Evaluate your current breakdown across asset classes, geographies, sectors and styles.
Risk
Add value by assessing, managing and communicating risk to clients – research shows they will invest more when they better understand risk.
Cost
Expense ratios and advisor fees can have a big impact on portfolio returns. Ensure overall fees are aligned with client expectations and portfolio goals.
Taxes
Tax drag impacts portfolio returns. ETFs are generally cost and tax efficient, which can help your clients keep more of what they earn.
Investment quality
When reviewing investment performance, consider putting funds that are struggling on your watchlist.
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Scenario tester
Anticipate the risks to your client’s portfolio in different market scenarios to better prepare for the unexpected.
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360 Evaluator
Examine your client’s portfolio from different angles and see the potential impact of adjusting allocations.
People
Hold investment committee meetings
Use this worksheet to facilitate investment committee meetings and enhance information sharing among team members.
Trying to grow your practice?
Now that you’ve streamlined your investment process, review our other two ingredients for business growth.
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