2. Focus on investment plan parameters rather than “style labels.” Sophisticated portfolio construction alone will not protect an advisor’s clients unless it is coupled with the ability to shift both tactics and strategy in response to changing market conditions. What happens, for example, when the benchmark index underlying a portfolio suddenly starts exhibiting more risk than expected? In many cases, the right move may be to detach from the index or move disproportionately into cash—and the TAMP’s managers will need to have the wherewithal and flexibility to do so. With this in mind, advisors should look for potential TAMP partners that have developed quantitatively-driven, almost Boolean (‘if X, then Y’) processes for adjusting their investment parameters – across entire portfolios if necessary—in response to an unexpected increase in volatility or other bear market conditions. Conversely, advisors should be cautious of TAMPs that follow narrowly self-constraining investment approaches that could limit their options in the case of a downturn or sudden crisis. Managers who remain focused on maintaining their investing “style” (for example, value investing, growth at a reasonable price (GARP), or others) in the face of rapidly changing market conditions may lack the flexibility or robust planning capabilities necessary to provide genuine downside protection for clients.
3. Track record of establishing pre-determined exit points—and sticking to them. At the level of the individual securities in a portfolio, knowing when to sell, what to shift to, and why can be just as important as knowing what to buy in the first place. Financial advisors can identify strong potential TAMP partners in this area by examining the triggers and pre-determined exit points they use to determine when to cut losses or harvest gains. How have they established these guidelines? Are they driven by a rational, emotion-free process, or do they rely on the manager’s gut instincts? How do they differ for the various demographics the TAMP seeks to serve or objectives it hopes to accomplish? Equally vital, advisors should ask potential TAMP partners for evidence of their track record in adhering to these exit points, since establishing collars and guardrails does no good if the managers habitually overrule them in times of stress.
Choosing the right TAMP partner can accelerate an advisor’s growth and efficiency by providing access to sophisticated investment expertise while taking time-consuming portfolio management functions off their plate. Given the recent profusion of TAMP offerings, however, the decision to go this route also introduces substantial complexity.
In seeking the best investment solutions for their clients, it is incumbent on financial advisors to dig deeper into each potential TAMP partner’s approach to asset allocation, as well as their risk management strategy and capabilities. Only by performing this in-depth due diligence can advisors hope to position their clients to achieve their financial goals while minimizing the impact of the next market shakeup, whatever form that event may take.
Greg Luken is founder and CEO of Luken Investment Analytics, a turnkey quantitative research and asset management firm that enables financial advisors to deliver innovative asset allocation strategies to retail investors. He can be reached at [email protected].