Broker Check
Should Your Financial Adviser Manage Your Portfolio?

Should Your Financial Adviser Manage Your Portfolio?

| May 17, 2018
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Financial Advisors Can Emulate Investment Strategists, But Should They?  

Financial advisors increasingly chose to create and manage their clients' investment strategies rather than outsource the heavy lifting to institutional teams. This shift in primary responsibility is in large part promoted by brokerage firms seeking relief from the pressures of fee compression. By shifting primary responsibilities from institutional players to individual advisers, firms can control costs better and retain fees otherwise paid to outside strategists and third party investment platforms.

While shifting the strategist's role may represent the best interests of an advisor and their firm it may not represent the best interests of the investor.  Cost control is a legitimate goal, but there can be a material trade off when it comes to quality control and conflicts of interest. In my experience, individual advisers rarely possess the requisite time, temperament, or training to replicate the institutional resources rapidly being removed from the equation. Brokerage firms offset this by providing their advisors a semblance of the technology used by strategists, but this can not replace the vast experience and resources possessed by institutional strategists.  

In simplest terms, the Investment Strategists' role involves portfolio design, investment selection, and continuous monitoring. Institutional strategists employ extremely sophisticated technology requiring advanced education and teams of professionals representing decades of experience. When an individual advisor takes over this role they are relegated to more basic technology, and necessarily lack comparable education, experience, and human capital. The expected result is often a material reduction in the quality of the investment management process. 

Outsourcing avoids conflicts of interest.  An individual advisor who personally manages their client's portfolio is unlikely to recommend their own termination when results don't meet expectations.  Conversely, an advisor who outsources may eagerly terminate a strategist who fails to meet expectations.  

The Proven Value of Outsourcing 

In my experience, advisors that outsource to the most powerful resources represent a more robust and objective opportunity for investors. While it might run afoul of a firm's profit motive, outsourcing nonetheless represents a material advantage in terms of results. One need only consider actual composite net performance for evidence. Advisors that do not outsource might show lower costs, but in my experience they rarely represent better composite net results.

It all comes down to proven process management, and I have yet to meet an individual financial advisor who I'd hire to management my client's assets.  

Questions To Ask Your Financial Advisor

  1. Are you serving me in a fiduciary capacity? 
  2. What is your investment management process and philosophy?
  3. What aspects of the process do you personally manage, and which, if any, do you outsource to a third party? 
  4. If your financial advisor is personally managing your portfolio then clarify where that conflict of interest is disclosed and how it is mitigated. Ask, "what happens if you don't meet expectations?"  

Trust But Verify

If your advisor is personally managing your investments rather than outsourcing the most difficult responsibilities then you should periodically shop your advisor.  This means comparing your advisor's results with another advisor.  It's a simple process that should quickly validate whether you are receiving the best possible results.  

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