Helping Advisors Blog

I wrote earlier about how packaged product programs enable advisors to focus their time on building client relationships. Indeed, the advent of multiple strategy packaged product programs can offer advisors with increased flexibility and institutional grade investment regimens for the management of their client accounts.

Selecting the right asset allocation strategist is critical to an advisor’s success, and getting comfortable with answers to the questions previously laid out, to help evaluate a particular program, is a step forward. Here we will begin to break program considerations out further into their main components, to hopefully help advisors identify a program that works for them, one that complements the successful relationships they have with each of their clients.

Asset Allocation

Packaged product programs have two main components: a capital market asset allocation recommendation and an implementation recommendation through the mapping of investments to the asset class weights of the allocation. Asset allocation recommendations run the spectrum from plain vanilla strategic asset allocation to highly tactical market timing with multiple variations in-between.

When selecting a packaged product program, it is critical that advisors understand the asset allocation strategy deployed by the strategist. For example, a tactical strategy will come with much greater risk of forecasting error than will a strategic strategy. Client portfolios that fluctuate due to a tactical strategy may require that advisor to service concerned clients as opposed to finding new relationships. Strategic asset allocation may limit upside return and downside risk, but perhaps more importantly it enables advisors to establish return expectations that help to diminish client service meltdowns.

Product selection

The depth, quality and reliability of product selection and implementation processes vary greatly. When considering the implementation process deployed by a strategist, the first item to consider is the objectivity of that process. Next in importance is the potential drift that can occur from the strategy to the product implementation. Drift can occur because of benchmark mismatch between the asset class used in the strategic asset allocation model and the products selected in the account. Drift is most likely to occur in a program where the strategist selects from among the thousands of products available in the market. These products can at times stray from their stated investment objective without the strategist being aware.

Another limitation of using individual products to gain desired exposures surrounds tax implications associated with making manager changes. If a strategist decides to replace a manager, the investor may have a direct tax liability associated with the sale of the product. Strategists that deploy multi-manager products to gain exposures may mute tax liabilities as there is no direct product sale and securities may be retained by the new manager taking over a sleeve.

Asset allocation strategies that are deployed with the strategist’s proprietary products may minimize style drift. The strategist making the asset allocation decisions and the manager managing the product assets are closer aligned and in communication with one another. That said, while drift may be minimized, a strategy that only selects from proprietary products will have minimal deployment options when performance of a proprietary product slips. Said another way, the objectivity and flexibility of proprietary strategies can be suspect.

This is a large topic with much to consider. In a future post I will explore my final considerations for selecting the right strategy.

Series: Selecting the right strategy