Model Portfolios for Advisors
What is a model portfolio?
A model portfolio is an advisor-constructed group of financial instruments that the advisor funds and trades on behalf of clients. Model portfolios can be an efficient, time-saving tool that facilitates a more organized approach to investing client assets.
Models allow advisors to create groupings of financial instruments based on specific investment themes, and invest client funds into the model, rather than taking time to invest in a single instrument. The advisor can establish target percentage allocations and rebalance as desired using this technology.
A model portfolio can invest across asset classes, including stocks, options, futures, forex, bonds and funds. The advisor can establish the target percentage allocations or keep them dynamic, investing a portion of clients’ funds into the portfolio and then simply trade the model’s assets. Trades made in the Model Portfolio are automatically allocated among the invested clients’ accounts.
The steps to creating the Model Portfolio are straightforward. The advisor:
- Creates the model,
- Invests client funds into the model,
- Trades the Model’s holdings, and
- When necessary, rebalances a client’s Model holdings
Model Portfolio Creation
Create the Model Portfolio from the Portfolio tab in Classic TWS.
Up at the top you can see the ‘Display Selector’. To the right of the Display Selector there is another dropdown menu that changes the information displayed on the Portfolio page. Currently our view in the Display Selector is set to ‘All’ and ‘My positions by model.’ This lets you see the Models already created in the account at the top of the page. You can click the [+] at the left-hand side to expand each Model to view the positions currently held within the model.
Below that, you’ll notice the segment ‘Independent’. ‘Independent’ represents cash and assets not invested in models.
If you sort by ‘Total ungrouped positions’, notice that the portfolio page populates with all positions rather than breaking out the Models and the Independent.
If you choose to sort by ‘Models by Account’, the Portfolio page populates with the percentage of each sub-account invested in each model, as well as a summary section that aggregates the percentage of assets in models versus independent, which will add up to 100%.
Model Setup & Initial Funding
Click on the Dislay Selector drop down menu, and you’ll notice there are three sections: Models, Groups and Accounts.
Click on ‘Model Setup’. Once in model setup, you’ll see existing models at the top along with the Market Value of each model and the % of Market Value columns.
Below you have the Market Value of the Independent side.
To the right, notice there is a series of buttons. Some are active while others are grayed out. Click ‘Create Model.’ A window will appear, allowing you to enter in a model name and code. Note that the code cannot be changed once it has been created, but you can change the Model name by double clicking in the appropriate cell.
Once entered, you’ll notice that if you click ‘Exit model setup’ to return to the Portfolio Page, the new model will display in the Models section. At this point the model has no funds, no assets and no investors. This will be reflected on both the Portfolio Page and the Model Setup Page.
Now that the new Model has been created, it is ready to accept investments and specify instrument allocation percentages. There are two ways to initially invest funds:
- You can specify the target percentage allocation for each investment instrument first and then fund the model second. In this case the system will automatically create orders to purchase assets in proportion to the defined target percentages when the model is funded.
- You can fund the model first and then trade the investment instruments (and consequently define the allocation percentages) second.
Regardless of the method you use for initial funding, subsequent client investments will be allocated based on these specified percentages.
Specify the target percentage allocation for each investment instrument first and fund the model second.
- To do this, select the model you’ve just created and you’ll notice a number of buttons on the right-hand side of the screen become active. The button of interest is the ‘Set Target Allocations’ button.
- Clicking on ‘Set Target Allocations’ generates the ‘Rebalance Model’ window. Type in the tickers of interest for the model and specify the percent of allocation for each asset. When inputting the target percentages, be sure to type in a numerical value; there is no need to enter the % sign.
- Once satisfied, click ‘Save Target %’. Once you click ‘Save Targets’, the values turn purple. Additionally, the target % at the top of the right-most column updates to 100%.
Once your target % has been set, it is time to fund the model.
- Use the Portfolio Page to access the Display Selector menu. If you find yourself still in Model Setup, simply click ‘Exit Model Setup’ to return to the portfolio page. Ensure display is set to ‘All’ with ‘My Positions by Model’.
- Click on the Display Selector and choose the client account that will be investing in the Model. If the new Model isn’t displaying, simply click the green [+] sign next to where it says ‘Models’ to view all available models.
- Right click the model in the which the client wants to invest and click ‘Invest in [model name]’,
- Enter the investment dollar amount and press Enter. Notice the investment amount and final amount match up because the model is not yet funded. The ‘% of final’ column displays the amount that will be invested in the model as a percentage of the total amount invested in all models.
- Notice below the main buttons (‘Create Investment Orders’ and ‘Cancel’), there are two options with checkboxes. Check the box labeled ‘Transfer positions from Independent when available’. This selection will ensure that any existing positions in the Independent side of a client account will transfer to the model. For example, if a client already holds Microsoft stock, and the model is slated to have a position in Microsoft, the client’s existing position will transfer to the model rather than creating unnecessary transactions or inadvertently overweighting the client account.
- When ready, click ‘Create investment orders.’
- At this point, the Model is funded with cash, and the account’s cash balance has been reduced by the amount of the investment.
- Because you have already defined your target percentage allocations, the investment is allocated and Investment Orders are automatically created in the lower panel.
- You can click ‘Transmit All’ or adjust orders and then transmit.
- Alternatively, you can click the Save button. Selecting Save will execute any transfers that may exist from the Independent to the model, while new orders remain in the queue in case you would like to adjust the order and transmit at a later time.
The other way to fund the model is to fund the model first and then trade the investment instruments (and consequently define the allocation percentages) second.
To clear the previously entered percentage allocation, go back to the Rebalance Model window. The button is located at the top right-hand side of the portfolio page. Enter zero for the allocations, or delete the targets by clicking ‘Clear Targets’. Once those have been zeroed out, you may proceed to first fund the model with cash.
Exit out of the Rebalance window return to the Portfolio page to engage the other method of funding your model.
- Once in the Portfolio window, open up the Display Selector. Select the client account that will be investing in the model.
- Right-click the model in which the client wants to invest, and click ‘Invest in [model name].’ The Portfolio page will display the Client account, including the models in which that account is invested, and the Market Value of the Independent side of the account.
- Enter the investment amount for the model of choice and press Enter. You’ll notice that, as before, the Investment amount and the Final dollar amount are equal, and the % of Final column shows the amount that will be invested in the model as a percentage of the total amount invested in all models. The Investment Amount and the Final amount are equal in this example because the client has not yet invested in this model. If the client were already invested in the model, the amount entered in the Investment Amount column would be added to the existing figure in the Final column upon pressing Enter.
- Next click ‘Create Investment Orders’ and notice the screen populates with an order to transfer the specified cash value to the model. Click Transmit to transfer the cash.
- The model now has the cash balance specified.
It is at this point that you may populate the model with investment instruments.
- From the Display Selector, select the model. Notice it is empty except for the cash transferred from the client account.
- In the Quote Monitor, create orders for all assets you want to include in the Model.
- Create buy orders by clicking on the 'Ask'. Notice the orders below show you where they will be allocated as the model name is displayed under the Allocation column.
- When satisfied with the orders, click Transmit.
- The orders will start working and once filled, the Trade Log will flash. Look in the Trade Log to see your orders, the exchanges where they were filled, the prices at which they were filled and how much was charged in commission.
- The units are allocated amongst all invested accounts according to the percentage each account has invested in the model. If there is a cash balance, that is displayed as well. You may view the positions in the model by selecting the Model from the Display Selector and selecting view by Positions.
- This also sets up the model allocation ratios for all subsequent client investments.
Investing new client funds into an existing, populated Model
When you invest new client funds into an existing, populated Model, the new capital is invested using the Model’s existing allocation ratios.
- Select the Display Selector menu and select the new client account. Under the list of models, right-click on the model in which you want to invest client funds. Click ‘Invest in [Model Name.]’
- Enter the dollar amount of funds you wish to allocate to the model and press Enter. This will automatically queue up orders in the correct proportions to satisfy the specified investment into the model.
- Click Transmit, and you have successfully allocated new client funds to your model.
- To view the accounts invested in the model, select the Display Selector and choose the model you would like to view. Modify the display to show ‘Accounts’ instead of ‘Positions’ to see the summary of client accounts in that model, as well as funds in the model and percentage of the account allocated to the model. You can check the box that says ‘Show dollar amounts’ in order to display that information as well.
Set Target Allocations / Alter Existing Target Allocations
To set firm percentage target allocations or alter existing target allocations, select the ‘Rebalance’ tool from the right-hand side of the screen. The window populates and you may then choose to alter the targets.
- Enter the percentage allocation of your choosing for each stock in the model and press Enter. You will notice the cash portion of the model will automatically update such that the total allocation sums to 100%.
- Once you have entered your targets, click Save Targets. The targets will turn purple once you have clicked Save.
- Notice the ‘Create Rebalance Orders’ button in red. The orders needed to rebalance to the specified targets, whether buy or sell orders, will populate in the Trading panel. Click ‘Transmit all’ to start those orders.
Divesting Client Assets from a Model
- Click the Display Selector from within the portfolio page and choose the client account that will be divesting from the Model.
- Right-click the model from which to divest, and click ‘Divest from [model name].’
- Enter the divestment amount and press Enter.
- Notice the two check-boxes on the right-hand side of the screen. You can either 'transfer positions to Independent', and/or elect to ‘keep model open for fully-divested accounts.’ The latter ensures that the model remains open even if divesting all client assets out of the model. If unchecked and all assets withdrawn, the model will be deleted.
- The Former transfers positions to the Independent side of the account where appropriate rather than liquidating.
- Once you enter the divestment amount, click ‘Create Divestment Orders.’ This action triggers orders to sell assets in the Model equal to the value being divested, and in the same proportion as they are held in the model.
- Once divested, the model’s available funds are decreased by the divestment amount and the client’s cash balance is increased by the divestment amount.
- Click ‘transmit all’ to transmit the orders. Any transfers and/or trades will appear in the trade log.
- If you go back into the Display Selector to view the model of interest by ‘Accounts’, you will notice that the account selected for divestment now displays the updated allocation figure.
Reallocate Client Funds Among Other Models
To reallocate client funds among other models use the ‘Reallocate’ feature from the subaccount window.
- In the Display Selector choose the account of interest. Once the page has refreshed, right click on ‘Models’ and notice the ‘Reallocate’ button. Click Reallocate.
- The models will display with the dollar amount allocated as well as the total percentage allocation across models. Select the model to which you want to reallocate, and enter the percentage amount of allocation. Press Enter.
- When satisfied with your selection(s), click Create Reallocation Orders. Again, you can hit ‘save’ to trigger any transfers, or select 'transmit all' to trigger all orders and transfers.
- Once your orders and transfers are completed, go back into the Display Selector to see how the reallocation of funds has altered the mix in that client account. Set the Display Selector to ‘All’ and view ‘Models by Account’ to see the updated summary.
Withdraw Cash from the Model and Distribute It Across Client Accounts
Some advisors may want to withdraw cash from the model and distribute it across client accounts.
- You can withdraw cash from a model and transfer it to the independent holdings for all accounts invested in the model via the Display Selector. Click the dropdown menu and select ‘Model Setup.’
- Select the model from which you intend to withdraw cash and click ‘Withdraw Cash from Model.’
- Enter the percentage of cash that should be withdrawn and click ‘next’.
- The window will populate with the amount to be withdrawn. Note that cash will be transferred to the independent holdings of all accounts that have invested in the model, based on the current amount of cash in the account.
- When satisfied, click ‘Finish’ to initiate the transfer.
Delete a Model
If you delete a model, all holdings will become ‘Independent’ positions for all clients who are invested in the model deleted.
- To delete a model, select Model Setup from within the Display Selector menu.
- Select the model you would like to delete and click ‘Delete Selected Model.’ Model holdings become independent positions for clients invested in the Model, in the proportion they were held in the model.
- TWS generates a warning when you delete a model. If you are sure, select ‘Yes’ to delete.
- Notice that in the client accounts, the model you deleted no longer appears in the list.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
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