Approach With Caution

There are many approaches to portfolio management, but one of the most discussed in recent months has been the Total Portfolio Approach (TPA). With how often it is now being referenced, it felt like a good time to form a clear view on it. Not because we are on the side of it not being effective, but because we think there is a notable gap between how it works in theory and how difficult it is to implement properly day to day, particularly for financial advisors. 

It's worth noting that as we go through this exercise, a lot of the recent thought leadership for retail advisors on TPA is coming from alt shops. That does not invalidate the framework, but it does shape the narrative. The TPA is, by design, a proponent of a larger allocation to alternatives. 

But before getting ahead of ourselves, let’s step back and clarify what the TPA actually is, how it differs from Strategic Asset Allocation (SAA), and where we sit in our approach.

What is the TPA, and how is it different from SAA?

At its core, a traditional SAA framework is very familiar and intuitive. You start with a target mix of bonds, equities, and cash based on risk tolerance and time horizon. This inherently creates a static benchmark to measure against and rebalance as time progresses. You can make tactical adjustments around that structure when conditions change, but for the most part, the portfolio remains fairly tight to the benchmark.

The other end of that spectrum is the TPA, which essentially asks investors to stop thinking in silos. Instead of building portfolios by asset-class buckets, the TPA looks at the portfolio as one integrated system. The approach looks beyond investable assets, at goals, liabilities, spending patterns, etc. Each piece that is added to the portfolio is considered based on the role it plays in the entire financial picture.

The idea is that capital is capital; each new investment idea competes with every part of the portfolio to determine whether it can achieve the goal more efficiently than something already in the portfolio.  In that sense, TPA is less of an asset allocation framework and more of an investor identity framework.

Source: Purpose Investments

This is exactly why the approach has been so popular with large institutions. They manage a single large pool of capital, often with a single objective and very long time horizons. 

Why TPA is gaining popularity

TPA did not emerge out of nowhere; it gained traction in institutional settings where investors face constraints that traditional SAA frameworks struggle to capture. The large institutional portfolios have needs outside the normal retail client that force them to think across the whole portfolio, rather than siloed asset classes. 

More recently, the environment has helped increase interest in TPA. Higher correlations between stocks and bonds challenged the 60/40 framework. Volatility exposed the limitations of relying on asset class labels for diversification. At the same time, the menu of available investment strategies expanded, particularly in alts. 

All in all, the TPA might actually be a better way to manage portfolios, which helps explain why it has gained so much traction at the institutional level. There are research reports and evidence out there showing some better risk-adjusted performance. But effectiveness at the institutional level does not translate easily into implementation at the advisor level.  

Where the approach runs into reality

The first challenge for implementing the TPA is scale. Advisors are managing hundreds, sometimes thousands, of households. Each of those families has different goals and timelines. Replicating a true goal-based total portfolio framework across that many relationships is incredibly difficult. Some would say, well, you can build goal-based portfolios for different clientele, but the moment you start building modelled risk buckets or standardized frameworks to make TPA scalable, you are creeping right back to SAA. The irony is hard to ignore.  

The second challenge is what I would call the implementation gap. Many advisors still sit with the goal today of wanting to consistently implement SAA across their practice. Even a goal such as that is easier said than done. Maintaining discipline and keeping portfolios aligned with stated risk levels is already a heavy lift, especially without a team. 

The third challenge is governance and communication. Unlike institutions, advisors operate in an environment where decisions must be justified not just internally, but also to clients. Portfolios need to be easy to explain and replicable. While moving away from benchmarks might seem appealing conceptually, it would create friction when clients look for a familiar reference point to make sense of performance. Also, for many Canadian wealth management firms, monitoring and governing portfolios with this framework would be a significant challenge.  

The fourth challenge is liquidity management. Many TPA frameworks assume investors have incredibly long time horizons and can tolerate illiquidity. That is not the case, certainly not for every client or household on the book. Return expectations might look great, but life events happen, and a portfolio that looks great on paper can fall apart if liquidity is misjudged. 

The challenges list could go on for days, but the final challenge is simply the behavioural element. TPA assumes a level of patience and long-term conviction that is hard to maintain in practice. When different sleeves of a portfolio behave very differently, it becomes harder to explain why something is lagging and why it still belongs. In this scenario, advisors would end up spending more time defending structure than focusing on outcomes. 

In short, many current users of the TPA are largely insulated from real-time client pressure. Their accountability is typically to boards or investment committees that evaluate decisions over the long term. Allocation decisions for advisors need to be explained directly to clients through market cycles, often in real time. 

The middle ground

The most realistic approach for a is probably somewhere in between SAA and TPA. Portfolio construction does not need to be an all-or-nothing choice. SAA is not inherently 100% static, but it is often constrained to benchmarking. That creates a wide middle ground between tightly bound allocations (SAA) and fully unconstrained portfolio management (TPA). This is the ground that we think on for the management of our portfolios. 

In that middle ground, we have what we call dynamic asset allocation. The weights and benchmarks still matter, but they act as reference points rather than constraints. Investment tilts can be expressed within bounds, but beyond those benchmarks, more than an SAA portfolio. 

This approach preserves the operational simplicity advisors need while still being allowed to add some of their own flair to the portfolio. The scalability will be moderate, and it will likely require having some sort of team in place to carry some of the burden. 

In practice, this is often how well-run portfolios already operate today. Advisors start with a clear strategic mix while making measured adjustments over time. They take a holistic view of the macro environment, which determines their overall positioning.  

Final thoughts

The point of this discussion is not to state that the TPA is an ineffective portfolio strategy, but whether the juice is worth the squeeze for those who manage everyday retail clients. The most effective portfolios for advisors sit in the middle, remaining flexible enough to adapt as conditions change. In the end, all that matters is having a portfolio that strengthens the client relationship and can be scaled across a practice. Maybe someday we will all be running the TPA, but for now, it’s one step at a time. 

— Brett Gustafson is an Associate Portfolio Manager at Purpose Investments

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