Helping Advisors Blog

As part of a series of posts evaluating packaged product investment options, I’ve shared a framework advisors can use to identify a third party offering that fits with how each  manages their book of business and drives successful client relationships. Having explored asset allocation and product implementation, one quintessential question remains: how do asset allocation strategists select products or managers? I’ll get right to it.

Manager selection and implementation

How strategists select managers is important for understanding the ins and outs of any program. Many firms analyze products and managers based on a quantitative basis with a focus on a manager’s past performance. Past performance should not be an indicator of future performance and is rear-view investing. Alternatively some firms select managers based on qualitative factors (requiring significant resources) to determine whether a manager has a consistent investment philosophy with the potential to identify winning stocks.

Fees

Lastly, it is critical that advisors understand how performance is calculated and fees charged when comparing strategies. Advisors must understand whether the performance being reported is actual history or hypothetical back-tested history. The difference is the former reflects the returns an investor who was in the strategy may have truly earned whereas the latter reflects what they could have earned if they had been in the current mix of products historically. The fault with the latter method is that it is misleading in that it does not reflect changes to the strategy that would have been deployed over time. Moreover, since some strategists select products with impressive recent performance, this performance gauge can be disingenuous. Due to an individual’s purchase and sale date, it is highly unlikely that anyone can mirror the manager’s performance.

Fair fee comparisons requires that advisors add both the average underlying product expenses to the program fee charged to that strategy. Since program fees can vary by strategy it is imperative that advisors consider the products’ expenses to ascertain the complete fee.  Often strategies with lower average product expenses have higher program strategy fees and vice versa. Buyer beware!

Series: Selecting the right strategy