Total Portfolio Approach and Its Applications for Wealth Management

Strategic asset allocation assumes the constraints of asset-class buckets are the right constraints. Aaron Filbeck, CAIA®, CFA®, CFP®, CIPM, FDP, makes the case that a growing number of sophisticated allocators no longer accept that premise. The total portfolio approach (TPA) measures every investment against its marginal contribution to one portfolio objective instead of a sleeve-level benchmark, the model CalPERS adopted when it simplified its policy portfolio from 11 asset classes to two reference classes and moved to total-portfolio-only compensation. Filbeck translates TPA's four dimensions (governance, single portfolio culture, competition for capital, and a factor lens) from the institutional world, where it was built for sovereign wealth funds and pensions, into a framework wealth managers can apply to individual client accounts.

Key Takeaways

1. TPA measures every holding against its marginal contribution to the total portfolio, not against a fixed sleeve-level benchmark.
2. When CalPERS adopted TPA, it simplified its policy portfolio from 11 asset classes to two reference classes and moved to total-portfolio-only compensation.
3. The two risks institutions hit during the transition: leadership dependency on a single CIO's conviction, and underestimating how much governance and compensation redesign the shift requires.
4. Wealth management's version of TPA runs into individual client accounts, tax and liquidity constraints, and a governing body that is the client rather than a board.