The Power of Rules: Model Portfolios and Wealth Management

More wealth clients are seeking customization of their investment portfolios. In response, growing numbers of wealth managers are turning to model portfolios to offer personalization within a scalable business model. A rules-based approach could play a critical role in effectively delivering client-personalized solutions at scale.

We examine the potential benefits for model managers and financial advisers of a rules-based model-portfolio construction and management process and compare it to a less-systematic, traditional approach. In our analysis, model managers allocate to tech stocks between the rise of ChatGPT, at the end of November 2022, and June 2024.

Within the parameters of our analysis, rules-based and traditional methods for making tactical-allocation decisions in model portfolios produced similar performance and AI exposures. The primary difference between the two is that the rules-based approach would be more likely to meet the challenges of model-portfolio management with a greater degree of transparency and efficiency. The importance of addressing these challenges is growing with the heightened demand for customization by wealth-management clients.

Rules-based management of model portfolios can help meet five key challenges for wealth managers

*Model managers include CIO team, asset managers and broker/dealers.