Regulatory and market trends have led numerous independent financial advisors to direct focus on client relationship management versus day-to-day investment responsibilities. Yet a strong cadre of advisors still considers portfolio construction and maintenance central to their value proposition. Many pair their belief with a genuine enjoyment for security research and operational execution; or at the very least they lack trust in any third party’s ability to match their proficiency or performance.
In fact, nearly 80 percent of independent financial advisors in the fee-based community adopt a version of the “rep as portfolio manager” model. The challenges with the model are scalability and the increasing regulatory requirements.
To address some of the headwinds facing firms who choose to maintain investment management responsibilities, here are the top four ways independent advisors succeed as a portfolio manager:
1) Avoid excessive customization. Clients respond well to portfolios carefully tailored to their particular investment needs, and most advisors mean to deliver an individualized investing experience. But when an advisor has hundreds of individual portfolios to review and execute, it becomes impractical to customize the securities and allocation of each one. Inefficiencies lead to performance ineffectiveness. Regulators or clients may question why any two clients, with ostensibly the same or similar investment needs and objectives, have portfolios with significantly different performance characteristics. While there may be logical explanations, you can find yourself spending an inordinate amount of time addressing variances, increasing your documentation burden and trying to avoid regulatory oversight headaches.
That is not to suggest you squeeze everyone into three to five cookie-cutter models. But over-customization in the long term is bad for the investors as well as for the growth and strength of the firm.
2) Have a clear investment process. Too many advisors are quick to jump from one strategy to another. They adopt the next hot signal provider whose back-tested (though not battle-tested) numbers suggest they have it all figured out. Staying informed and being willing to evolve is critical to successful investment management. But new ideas should be carefully researched and undergo a consistent vetting process, which should include the input of your investment management committee (2b of this tip is to HAVE an investment management committee). Arrive at your convictions carefully and fully before you make important changes.
When that point arrives, however, implement your decisions swiftly. The other end of the spectrum houses the “paralysis by analysis” advisors. Whether your next move is the result of market condition, product circumstances or due to change in philosophy, if you’ve done your homework, get on with it. Nothing is more unsettling to a client than an advisor in between decisions.