Muldowney: I agree with Lewis. MDPs can be part of a solution, but are they perfect? No. Allocation strategies are already present as solutions for the middle market. Since the introduction of no-load mutual funds, the mutual fund itself has become a commodity. Interestingly, the part that has not changed is the role of the professional salesperson, who still gets paid for delivering investments to amateur buyers. Usually these products can be acquired for free via no-load vehicles.
von Borstel: Those are good points, but as with any investment, they've got some very attractive features but aren't without a couple of drawbacks. Generally, they don't contemplate all 22 asset classes. In building a model, they tend to be based on the more simplified stocks-bonds-cash platform. Real estate and futures/commodities are usually left out of MDP asset-allocation models. Those are beneficial asset classes I like to build into portfolios of $70k or better.
Strickland: Well, I am not convinced that MDPs are the perfect solution, either. It depends upon the quality of the managers within the program. Like SMAs, you limit your choice of managers to those who wish to participate in those programs. The difference is that with SMAs you can choose your managers and add mutual funds where a particular sector is poorly represented by the choice of managers. This is not an option with MDPs.
FA: We hear that MDPs reduce the client's risk profile by diversifying within managers instead of just having one manager with one style. Any other way to accomplish this?
von Borstel: This same scenario can be executed using mutual funds. In fact, you can have more choices of which asset classes to include in the portfolio for even greater diversification. The counter argument is one of cost. But greater diversification, choices and flexibility have to be worth something in that equation.
Walker: I would use an "overlay manager" to coordinate the buys and sells, and manage tax considerations, while using other "best of breed" managers to provide the stock and/or bond recommendations for each style segment.
Yetman: As we all know, there are many ways to lower risk in a client's portfolio. I assume we are talking about market or volatility risk, which is reduced by diversification of any kind. It is true, however, that if you want to have the fee-based, separate account environment and you have only $300,000, then the MDA approach will help you lower the clients risk by enabling them to own more asset classes.
Muldowney: Even if the investor deposited funds into separate and randomly selected index funds, the total portfolio risk would be reduced. The MDP and the allocation strategist ostensibly helps by measuring the risk, being conscious of costs, creating efficiencies and helping set reasonable investor expectations.
FA: It improves efficiency-i.e. paperwork, dealing with just one OPM instead of multiple separate managers. Agree?
Strickland: It is certainly fewer headaches for the advisor and, to a degree, the client who would prefer not receiving excess paper work, statements and tax information.