Asset Allocation is a Trade-Off

As a financial advisor and a businessperson you are likely no stranger to having to carefully consider what your decisions might mean for multiple stakeholders – whether they be business partners, regulators or employees, to name just a few.

A key set of decisions is around asset allocation and portfolio implementation. Obviously, it’s imperative that you construct portfolios in a way that increases clients’ chances of achieving their objectives, considering your investment philosophy, the cost to clients and the risk and return tradeoffs.

But while clients are the most important stakeholders in these decisions, they are not the only ones. You also need to consider your team. Are your models consistent? Are they easy to explain? Do clients with similar objectives have similar portfolios, thus making meeting preparation more efficient?

Creating personalised or “bespoke” portfolios for each client may allow you to meet every conceivable variation in taste or preference, but what impact does this level of granularity have on your team, your business and, consequently, your ability to serve your clients collectively?

Don’t forget that your partners and shareholders also have stakes in these decisions. Is your current approach scalable? Are you able to build systems and processes to manage portfolios and increase the efficiency of the advice you deliver, or the profitability of your business? Are you able to focus most of your time on activities that are directly related to helping your business thrive and grow?

So, while client interests always come first, a blinkered focus on any single stakeholder can lead to poor outcomes for the others, and in turn the whole business.

With that in mind, let’s examine how this holistic approach to stakeholder management can play out in considering portfolio construction:

Bespoke Vs Model Portfolios

Creating bespoke portfolios for each client is a compelling proposition. From an investment standpoint, it implies that their situations are unique and demand portfolios optimally designed to deliver outcomes relevant to their respective circumstances.

But while you may be able to design portfolios that do just that, it’s worth asking whether this is necessarily the best approach given the pressure it puts on your team and your business – and your resulting capacity to deliver the best overall client outcomes.

For example: Imagine a client coming in for a review meeting during a time of market volatility. Her portfolio is completely different to that of the prior client and the next one. Which client is holding which stocks or is invested in which manager? What additional research do you need to do? No two meetings are the same, which may keep things interesting, but this is not likely to be ideal for you, your staff or for your clients’ ability to focus on the value you bring in other areas like wealth planning.

This kind of scenario can have a flow-on effect to the financials of the business. More pressure on the team can lead to higher costs and lower productivity as there is a limit to how many clients that advisors and their teams can effectively handle under such circumstances. Is it creating capacity constraints? Is it hurting the operating margins?

Of course, there is no denying that each client is unique, and each requires a unique financial plan. But does that mean that each requires a unique portfolio? What is the marginal benefit to the client of a bespoke portfolio and how does this compare with the marginal cost to the business?

When making the determination for your business, it is worth considering that carefully designed model or “guideline” portfolios, positioned well with clients relative to their needs and objectives, may deliver similar investment outcomes while delivering marked benefits for the team and shareholders in the business.

Fully implemented Portfolios

Alternatives to bespoke portfolios are fully implemented ones, such as multi-asset portfolios. These are an outsourced investment model where asset allocation, rebalancing and manager or security selection are handled by a third party.

In this approach, advisors outsource decisions on the degree of home bias in the portfolios and the allocations towards equity and fixed interest. But they also gain the benefits of professional investment management. The portfolios also can be rebalanced with other investors’ cash flows, potentially reducing impact of buy/sell spreads and the number of transactions.

Depending on how closely your clients’ risk and return objectives align with the available fully implemented portfolios, this could be a compelling option.

Of course, in an outsourced option, you must trust the investment manager to be true to label and deliver reliably what you and your clients expect. So, due diligence is critical. Additional questions may arise. How will your clients feel about a single line on their statement? Does it imply, and are you comfortable with the implication, that there is less complexity in your approach?

The role of the support function also shifts under this model. Without having to monitor portfolio weights and handle rebalancing transactions, the team can focus on the strategy and planning aspects of their roles. Having clients with similar risk/return profiles in similar portfolios can allow the team to leverage the communication resources of the manager or to build a small number of high-quality client presentations that can be rolled out across your client base.

This approach also can provide significant opportunities for the templating and systematisation of processes. How might your team spend that additional time? Could they think more about the client experience, instead of doing research and preparing for meetings? How might the team respond to a simplified back-office process?

Importantly, this approach requires a value proposition that isn’t focused only on investment selection, but rather on the other areas of your clients’ lives where you, as an advisor, feel you can add value.

It is important to understand that you still own your firm’s investment philosophy using this approach and you still are committing to reviewing it and reaffirming it, while continually monitoring the investment manager. But you are also signaling to the client that your value does not lie solely in portfolio construction or rebalancing.

Is this something that you and your team would be confident articulating to your clients? How do you think clients would react?Shifting the focus from investment implementation can create significant additional capacity. Depending on your personal objectives, this could create more time for speaking to existing clients, finding new ones, or focusing on your family and interests outside the business.

Ultimately if this model means you can retain your existing clients and continue to grow, while providing great client outcomes, you stand to benefit from positive flow-effects to the financials of your business.

Summary

There is no right or wrong approach to the business models discussed above. Each has its merits and which one you choose will depend largely on how you see your role as an advisor and on what sort of clients you want to work with now or into the future.

Regardless of which approach you choose, the key is considering how it will impact on each of your stakeholders and their collective ability to deliver a great investment experience for your clients.

At Dimensional, we believe strongly in the importance of balancing trade-offs to deliver the best outcome possible for investors. Click here to learn more about how Dimensional and its full range of tools, training, and resources can help to navigate this sort of thinking in your business.

Disclosure

This material is provided by DFA Australia Limited (AFSL 238093, ABN 46 065 937 671). It is provided for financial advisors and wholesale investors for information only and is not intended for public use. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Any opinions expressed in this publication reflect our judgment at the date of publication and are subject to change. This information is provided for registered investment advisors and institutional investors and is not intended for public use. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Dimensional makes no representation as to the suitability of any advisor, and we do not endorse, recommend, or the services of any advisor. The opinions expressed herein represent the personal views of the author and not necessarily those of Dimensional Fund Advisors LP or its affiliates, and they are subject to change continually (including due to changes in the law) and without notice of any kind.