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Ask a room full of advisors whether their client portfolios are personalized, and nearly all of them will say yes.
The contents of those portfolios might tell a different story. Assets in third-party model portfolios reached more than $645 billion by March 2025, according to Morningstar, a 62% increase in less than two years.
I want to be clear that broad-market indexing has genuine merit. It delivers efficient exposure to markets and has driven costs down for millions of investors. We use them as an allocation tool inside tactical models.
The Evolution From Tailored Solution to Off-the-Shelf Product
I’ve watched that packaging happen from the inside. Early in my career, I led a team at the Philadelphia Stock Exchange that did product engineering, creating things like currency options so multinational companies could actually manage exchange-rate exposure instead of treating it as an act of God.
One of those projects became the semiconductor index. Today it’s accessible through an ETF, the same as gold, silver, and half a dozen other market sectors. A tool built to solve a specific problem eventually getting wrapped into something anyone can buy off the shelf is not a bad thing on its own.
The issue is the growing trend of sorting clients into one of a handful of pre-built models and calling the result personalized, regardless of whether the products inside that model are active or passive. Wall Street is one of the most effective marketing machines ever built, and it has done its job well. Main Street has been sold on the idea that a standardized allocation and a personalized one are the same thing.
When portfolios become standardized, investor experience becomes standardized right along with them, even though almost nothing else about those investors is standard. Their goals, tax exposure, risk tolerances, and individual spending needs are too individualized to be captured by many models that purport to be customized.
The Flaw in One-Time Risk Profiling
Consider what a risk-tolerance questionnaire accomplishes. You’re effectively giving a label to your client, like “conservative” or “moderate growth.” In many practices, that label becomes the entire portfolio design, rather than the starting point for one.
Diagnosing a client’s risk tolerance is valuable only if it keeps shaping the portfolio over time. Otherwise, the label is assigned once, the client gets slotted into whichever of a handful of models it points to, and that placement is not revisited as the client’s life or the market changes. That is how a firm ends up with hundreds of clients standardized into a handful of models that never quite feel attuned to what the client needs.
The lack of attunement to the client exacts a behavioral cost, too. Research from Dalbar has shown for years that the average equity fund investor holds a portfolio for roughly four years — well short of the horizon most financial plans assume — and rarely captures the return of the benchmark they set out to match.
Passive exposure solves market participation. It does not solve risk management. A portfolio built to stay fully invested through every cycle assumes an investor who can stomach every cycle. Few investors can, particularly retirees, who cannot afford a bad sequence of returns right when they need the money most.
Addressing the Human Factor in Portfolio Design
I have sat across from a client who wanted an aggressive growth allocation in a market that was calm and climbing. The same client, when volatility arrived, became the most conservative person in the room. Same client, same account, but a completely different person under stress. Sometimes it’s hard to spot this behavior before a downturn hits, and by then, the portfolio design is not the only thing at risk — the client’s behavior inside it is, too.
In our tactical model portfolios, for example, exposure shifts with market conditions instead of resetting on a fixed annual schedule, with the goal of managing risk and improving consistency rather than simply minimizing participation. In our relative-strength equity portfolios, that has meant holding meaningful cash during sustained drawdowns, an average allocation of roughly 20% over more than seven years.
Positions in those portfolios earn their place through a mix of fundamentals and technicals. They lose their place on technicals alone. If a holding stops performing, it does not matter whether it is a blue-chip name or the market’s current favorite. It comes out. That discipline matters as much on the way out of a position as it does on the way in, and it is where a lot of firms that talk about risk management stop short. They are rigorous about what they buy and considerably less rigorous about when they sell — especially once a frustrated client starts pushing back.
Building True Customization and Value
Many advisors build around a core-satellite structure for exactly this reason: A central allocation sized to a client’s larger goals, with satellite positions around it — like direct indexing, tactical sleeves, or targeted fixed income — that can adapt independently as circumstances change.
Different portfolios do different things at different times. Some clients need certain strategies weighted more heavily than others, and that flexibility is the point of constructing portfolios this way.
Tax management belongs in the same conversation, and it remains one of the more underutilized tools available to advisors. Investment returns are always uncertain. Taxes, in a taxable account, are far more knowable. Direct indexing and other forms of deliberate asset location fall into a category of decisions an advisor can actually control.
Building portfolios this way takes more work than sorting clients into one of a handful of models. It also means telling clients things they may not want to hear about their own behavior as much as about the market.
That conversation is harder than pointing to a label on a questionnaire. In my view, it also separates real personalization from marketing language. That is why we have been willing to swim against the tide on this, even when the standardized version of the business is easier to sell.
Read more by Joseph S. Rizzello:
Joseph S. Rizzello is chairman and CEO of NewSquare Capital.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
