Blog  Terminology Guide

Choose Your Words Carefully

The negative connotations of "investment model"

choose your words

A couple of weeks ago, we wrote about the wealth management industry’s inconsistent and confusion-inducing use of terminology (“A Model of Miscommunication”). We focused exclusively on clarity of meaning. A reader wrote in to add another consideration — a term’s emotional connotations:

You mentioned how you tend to use “model” and avoid using “strategy.” We are just the opposite. This is, at least in part, because clients don’t like the idea that they are being just stuck into an “investment model.” But they are open to having their portfolios managed in alignment with our “investment strategies” — which also conveys that we are trying to achieve the client’s investment objectives vs. for our own convenience sticking them into a “model."

The concern is that clients will react badly to following an “investment model” because the term implies a cookie-cutter solution.

Ironically, the perception can be the reverse of the truth. A “models-based” system is one in which each portfolio has a target portfolio constructed from a customized combination of asset-class level products represented by “models,” i.e. weighted lists of securities. The aim is to migrate each portfolio to its customized target, but in a way that satisfies any number of customization criteria, including tax-sensitivity, cost-sensitivity, social criteria constraints, etc. Some models-based systems are cookie-cutter (the kind that don’t allow for custom asset allocation, custom combinations of models, tax management, etc.). But in previous posts, we’ve made the point that adopting a “models-based” approach in combination with automated customization and tax management leads to more, not less, customization. The reason is that it reduces the incremental cost of providing customization and tax management to zero. And when you make something free, people consume more of it.

But the point remains that “models-based” may have a negative connotation — a false implication of one-size-fits-all. What’s the solution? Our reader addresses this by talking about portfolios following a “strategy.” We tend to talk about every account following a “customized target.”

They say that a rose by any other name would smell as sweet.1 But connotations matter. When we describe rebalancing systems, including our own, we obviously want to make ourselves understood at both an intellectual and emotional level. It’s clear we don’t always succeed the way we’d like to, but we think we’re getting better at it, mostly because our clients — and readers — help us learn.


For more on this topic, check out A Model of Miscommunication.

1 Romeo and Juliet

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