Tuesday, September 1, 2009

Apparently Planners Search for Direction Too

In an article entitled "Planners Hunt for Help on Portfolio Construction", the recent crisis caused examination (or re-examination) of portfolio construction practices among the nation's planners, which 2007 report authors Cerulli Associates call "a hot button issue".

"As many advisers have looked to expand their practices, they have realized that their highest value activity is spending more time with their existing clients and acquiring new clients," according to CA, which produced an analysis of its survey for FPA Insight, a research newsletter for institutional members. "As they search for ways to better focus their activities, they have looked for the things that were essential to their practice and those that they could outsource. For many advisers, this meant looking to the outside for help with portfolio construction."


What follows is an excerpt from CA's report in FPA Insight (Volume 1, Issue 1):

Portfolio construction is a part of an adviser's practice that has only grown in complexity. During the bear market of 2000-2002, many advisers were forced to accept that their core talent was not managing client assets. In addition, there are more products available than ever before for financial advisers.

The mutual fund universe alone boasts more than 8,000 choices before taking into account a growing selection of separate accounts, exchange-traded funds (ETFs), and alternative investments. Added up, it presents a dizzying array of choices for the financial adviser.

Our survey results confirm advisers' feelings on this topic. More than 75 percent of advisers agree that portfolio construction has grown more complex.

In addition, more than 70 percent of advisers report using a wider range of products, changing their product allocations, and using more complex products. One can see how an ever-widening product universe would affect the complexity and volume of products used by advisers. In fact, the most common reason given by advisers about why portfolio construction has grown more difficult is that it has grown so time consuming.

Outsourcing this task, however, is not a widespread trend. Just over half of the advisers responding to this quarter's survey stated that they never outsource any portion of the portfolio construction process. There are a number of reasons advisers have resisted making this move. Despite an industry move to more holistic planning and deeper client relationships, many advisers are offering many of the newer products in an effort to distinguish themselves. In addition, clients are more sophisticated and, in some cases, are demanding these new products. Finally, many advisers come from a deep investment management heritage and may have begun their career recommending individual stocks.

Although the reasons may differ from adviser to adviser, the net effect is the same-this is not a task over which many advisers are willing to completely give up control.

Although advisers have a stated objection to fully outsourcing this task, a different picture emerges when examining their daily activities. More than half of advisers report using third-party tools to help determine asset allocation. For those advisers associated with a Broker-Dealer (B-D), exactly half report using platform tools to determine asset allocation.

These same advisers report getting help from their B-D in the form of model portfolios, research and due diligence, training and education, and integrated product platforms. Although these advisers might not consider themselves outsourcers of portfolio construction, many of these are activities that leverage outside expertise in order to help save them time.


CA believes these shifting product trends will only continue. When asked what products they use in constructing a core satellite portfolio, ETFs ranked as a popular option for both the core and the satellite portions of the portfolio. This reflects the flexibility of this emerging product. Advisers can deploy the product as a low cost, indexed option at the core of a client portfolio.

However, as product development accelerates, many advisers are seeing the advantage of using more narrow offerings or taking advantage of intraday trading. Not surprisingly, more than half of the advisers surveyed reported that they plan to increase their allocation to ETFs in the coming year.


Folks, the ETF revolution has been going on for some time now. To say that advisors are starting to embrace it doesn't give much comfort. I suppose one had to see how they performed versus index funds but that case has been successfully made for quite some time. ETFs perform just as well with less cost. As a pure source of market exposre they are the lowest cost vehicle around.

Advsiors don't want to give up control over portfolio construction for two reasons in my opinion: 1) it offers a source of fees in an industry where business models almost demand it, and 2) it offers the opportunity to differentiate services. The latter is key to marketing. If your product is like any other (a commodity) how can you premium price it?

Does that mean, Mark, that all of this offers no value? No, that is not what I am saying. It offers the opportunity for value creation. Very few can provide it though.

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