von Borstel: Pretty soon, the MDP platform looks like a lazy man's way to consulting. How much value do we really add and does this approach encourage us to maintain a healthy, consistent level of fiduciary communication with our clients? Actively managing the client's portfolio forces us, if we're doing it right, to know our clients better, to be more involved, to be more aware and more in tune with what's going on. In the long term, I think that's a clearer path to better results and happier clients.
Walker: I agree. An MDP is a tool, and a tool used properly is a plus. But even a good tool, used inappropriately, is a negative. An MDP seen as a shortcut, or just a new product to sell, is likely to end up as a disservice to the client.
FA: A survey by Financial Research Corp. stated that most advisors with more than $100 million under management enjoy the consulting process, and they feel MDPs take them out of the loop. What are your thoughts?
von Borstel: I would agree with that statement. I give better value to clients because I do invest lots of time communicating about the nitty-gritty with people-asking the tough questions, listening to what they need, dealing with their assets as to how much can work, and what their real risk tolerance is, and so on. The underlying danger in over- systematizing what we do is that it tends to lead to less client interaction. As a macro-planner, I'm an expectation, risk and relationship manager-not an asset manager. We have to continue doing the fiduciary due diligence to ensure that we're investing for the client's reasons and not because it's easy or systematic for us to do it a certain way. There's a danger in trying to make investing so simple all the time. "Simple" is not necessarily the best value. Just like "cheap" is not the best value.
Strickland: I do not think that MDPs will be the choice of product delivery for higher-end advisors for many of the reasons Wayne just stated. It may be the product of choice, though, for those advisors who have chosen not to develop their consultative skills and wish to keep their overhead low and concentrate on marketing.
Muldowney: Not to be a contrarian, but MDPs do not take the advisor out of the loop unless the advisor thinks that his or her job is analyzing stocks or funds that have already been analyzed. The advisor is supposed to assemble the allocation components into portfolios that actually work to meet client goals and expectations. This is extremely rewarding.
FA: Ron Surz, president of PPCA, a performance attribution firm, was quoted as saying, "MDPs are like trains leaving the station without any brakes." I think he meant that MDPs have the potential of exposing clients to such risks as style drift. Do you see this as a possible problem?
Muldowney: The goal of any good administrator is to keep the trains running and to do so on time. The potential to style drift is always present. Ron's comments are keen and insightful. Asset style drift is a problem anytime something is placed on auto pilot, whether it is a mutual fund or an MDP product. Just as with cruise control in our automobiles, you do not leave it unattended. Allocation strategies are established with a narrow range of tolerances specifically to avoid asset style drift. Allocation strategists monitor the standing asset allocation in each client portfolio on a regular basis and execute rebalance transactions to bring the client portfolio back into the intended asset allocation.
Yetman: Style drift is always an issue when choosing managers within an asset allocation program. In most MDP programs, the brokerage firm is using proprietary managers. In that case there may not be any other choice, nor is there monetary incentive to eliminate managers that style drift.
Strickland: But it depends upon the diligence of the MDP provider, since the advisor will have not control over manager selection.