Conventional wisdom holds that financial advisors add value through security selection and asset allocation. Post-Great Recession, though, things are changing very quickly. Today, after completing all of the required client assessment and disclosure forms, spending quality time with clients, doing succession planning, cultivating new clients, and (for indies and RIAs) managing custodial and other vendor relationships, advisors have barely enough time to pick stationery, let alone stocks and asset classes. The result is a clear movement toward outsourcing all or part of the asset allocation and security selection process.
Nature abhors a vacuum, and so a whole host of different types of shops have emerged to serve this market. These include turnkey asset management programs (TAMPs), fund and separate account platforms, packaged globally allocated mutual funds, RIAs managing assets for one another, investment research targeted to advisors' allocation and security selection needs, and more. Because these companies and technologies are still emerging, the market has not yet fully matured. Immature markets mean opportunity, of course, and advisors and their clients should benefit from increased competition.
As an advisor, what you see of these folks and their products varies widely by channel and even by region. National full-service (wirehouse) advisors have and will continue to see their firms' wrap platforms and the allocation models coming out of the chief economists' and other researchers' offices. Advisors based in regional firms will have a similar experience, likely on a somewhat smaller scale. Independent advisors and RIAs have the best understanding of the TAMPs as they will have had to select either a set of models or research to follow or to respectfully disregard on occasion. Advisors can also rely on the suites of tools provided by custodian firms, which may include allocation models from one or several shops, allocated portfolios of ETFs and separate accounts, and/or the ability to create a set of private label portfolios.
As a general rule, we are fans of this shift. We believe it allows advisors to act in a truly consultative and objective manner in their clients' best interest, and to leave the operational functions, such as portfolio rebalancing (way below advisors' pay grade), to operational professionals — where it belongs. We also believe that global tactical asset allocation is what clients really need to grow and preserve assets, and that many advisors simply do not have the in-house resources to compete with the effectiveness of many of these sophisticated offerings.
Costs and their location in the food chain of asset allocation programs vary widely. Globally allocated mutual funds may carry fees in excess of 100 basis points, while some wrap platforms and research solutions may cost far less. Depending on what you're charging your clients for advice, and the total expense ratio to the client, these programs can be a cost-effective way to offer a very comprehensive solution to investors.
As you consider asset allocation offerings, dig deep into what these models deliver. Be sure that the asset allocation solution you select is in sync with your story, business model, and client base. For example, if your clients expect a people-driven process (the subtler distinction of fundamental versus quant being lost on most investors), you might want to look at a firm like Windward Investment Management in Boston. Its quantitatively-driven global models use low-cost ETFs, and the firm is a brick-and-mortar RIA run by investment execs, so it will have a familiar feel for some types of clients. Contrast that with the research-driven team at Riverfront Investment Group, which may be a fit for more research or academically-oriented advisors, and the very wide availability of programs offered by FundQuest.
Then you'll need to scrutinize the details of the program. How many asset classes? Long-only? Approach to hedging? Black box only? Track record? Benchmark(s)? There are as many ways to run one of these programs as there are asset managers. And picking the right one as your partner can be a great way to differentiate your advisory practice.
Lisa Cohen, CEO of Momentum Partners, is a founding member of the RepThinkTank, a consultancy joint venture with Registered Rep.