A substitute list for your models: what to buy when a client can't hold the model's fund
A substitute list names, for each holding in a model, an approved alternative to use when a client can't or shouldn't hold the original: a restriction, a tax situation, a fund not available on the account type, or a legacy position. Keep it with the model, review it whenever the model changes, and record on the account which substitute is used and why. It keeps substitutions consistent across advisors and explainable later.
One advisor puts a client who excludes tobacco into Fund B instead of the model's Fund A. Another advisor, with a similar client, picks Fund C. A third account holds Fund A anyway because nobody noticed the restriction. All three accounts are "on the Growth model", and none of them look the same. A substitute list prevents most of that.
When are substitutes needed?
| Reason | Example |
|---|---|
| Client restriction | Excludes a sector the model's fund holds |
| Tax situation | A large unrealized gain in a similar existing holding |
| Availability | The model's fund isn't available on that account type |
| Legacy position | A holding the client wants to keep in place of part of the model |
What should the list show?
- Each holding in the model, and its approved substitute.
- When each substitute is used (which reasons apply).
- Who approved it, and the date.
- The model version it belongs to.
How do you use it?
- When an account can't hold a model fund, use the approved substitute.
- Record on the account which substitute is used and why.
- Include those accounts in the batch rebalance with the substitute, not the original.
- Review the list whenever the model changes.
A worked example
Take a hypothetical two-person RIA with four models. At its quarterly model review it writes a substitute list: one approved alternative for each of its eleven model holdings, with the reasons each covers. Six accounts are found using different substitutes for the same reason; they're moved to the approved one over the next rebalance, and each account now records its substitute and why.
What are the common gaps?
- Different substitutes for the same reason across accounts.
- Substitutes nobody recorded, so the account just looks "off model".
- A model change that leaves the substitute list out of date.
When is this overkill?
If no client has restrictions and every account can hold every model fund, you don't need one yet. The first restriction is the time to start.
How Advorra fits
Advorra keeps versioned models with their philosophy and rebalancing rules, each account's strategy of record, and a trade blotter with an exception queue, so trades that differ from the model show up for review and the model history is kept by version. See the product page, or read about client restrictions and the one-page model description.
One thing to do this week: pick your largest model and write one approved substitute for each holding.
An operations routine for documenting substitutions, not investment advice.
Questions advisors ask
Why keep a substitute list rather than choosing each time?
Choosing case by case leads to different accounts holding different substitutes for the same reason, which is hard to explain or review. A list keeps it consistent.
Who approves substitutes?
Whoever approves model changes, usually as part of the regular model review.
Should the substitute be recorded on the account?
Yes, with the reason, so anyone looking at the account knows why it differs from the model.
How often should the list be reviewed?
Whenever the model changes, and at least at each scheduled model review.
Is this investment advice?
No. It is an operations routine for documenting substitutions.
See it on a demo firm
Advorra is practice software for independent RIAs: clients, models, IPS, billing and compliance records in one place, on top of the custodian you already use. Built by The CollabHub.
Get in touch