Strickland: In my opinion, mutual funds are the better alternative for most investors. But on the other hand, it may be the better alternative for smaller investors whose assets are not too attractive to larger advisors. It is a better option for the do-it-yourself-investor.
Yetman: Separate account management and mutual funds used to be for different clientele. Now that account minimums are lower, many clients can obtain adequate diversification using separate accounts. Some clients prefer to own funds that they can follow in the paper. My clients also like the fact that there is more information available on mutual funds than with separate accounts. My opinion is that since most of my clients meet the minimum for proper diversification under either approach, I want the best money manager in each asset class regardless of whether they are a mutual fund manager or a separate account manager.
von Borstel: That makes sense, John. The fact is the less money you have to work with, the more attractive an MDA-type product becomes. It's virtually impossible to do what I would want to do for a client's ideal asset allocation [combining individual funds and direct investments] if they have less than $60k. And even if I could, the relative cost of periodically rebalancing that portfolio would rob most of the performance I'm trying to harvest. In the current environment, between about $60k and $100k, it's almost a toss-up according to the client's "simplicity tolerance." After that, notwithstanding the client's need for simplicity, I'm convinced I can add value combining traditional and alternative investments, or at least building a core portfolio that way and adding an MDA-type platform for some piece of the overall portfolio.
FA: An MDP can cause problems with the portfolios if one manager consistently underperforms. You can't replace your underperformer. Comments?
von Borstel: Probably there are two arguments here-the obvious one would support your assertion. But first you'd have to define what you mean by "consistently." You have to be careful about that. Is it one quarter, three quarters, one, two or three years? Even within a given asset class, say Large Value, a given manager's style approach will fall in and out of favor-maybe even for years at a time. And, if we're true to MPT, we don't want him to style drift just to "create" Alpha. If we answer the consistency question incorrectly, we'd almost constantly be replacing managers for one reason or another. If you believe asset allocation's role in MPT, at some level, you have to conclude that the relative performance of similar investments is not what brings-or fails to bring-you wealth. And, if that's true at the investment level, then it logically follows that it is true at the manager level.
Muldowney: The underperforming aspect is a keen observation and one that will not be advertised by the MDP-this is another area where the allocation strategist shows superiority.
Walker: One solution is to lean on the sponsor to replace the underperforming manager. If unremedied, and underperformance persisted, the sponsor who deals with independent advisors would lose credibility and, ultimately, the advisor as a client.
FA: Do you agree with the argument that MDPs help transition more easily to fees those advisors who still do some commission work? They really don't have to understand the consulting process; it is already done for them. Is this just an easy way out?
Walker: There is some danger that MDPs could become "separately managed accounts on training wheels" for advisors who want to provide a hot new idea. The advisor needs to understand the consulting process so that he or she can then understand what is behind the MDP. The advisor has to do due diligence on the provider and understand "the moving parts" of the MDP. How else will the product be properly matched with client goals and objectives and expectations? This is especially important where a provider offers a variety of MDPs designed to fit client risk tolerances and objectives.
Muldowney: I agree with Lewis, and I do not think that this is a transitional tool. While it may work in the field of sales, it is a grossly unfair implication that the professional advisor does not have to understand the consulting process.