When managing a fund for an institution, the advisor determines the assets that will be paid into the fund and then makes investments that will generate enough money to cover the liabilities it will eventually have in the form of payouts.
To use such an asset-liability approach for high-net-worth individual clients, one of the first steps is to account for all assets, not just the ones in the portfolio. For example, human capital is an asset, one that is much higher for a young person than one near retirement, Horan says. Social Security is an inflation-proof asset that a person cannot outlive.
The liabilities are the goals the person has-paying for children's college education, retirement or a new house-and the advisor needs to build a plan that shows assets will cover those liabilities.
"Financial advisors may think of these elements, but we want them to put it into a basic, structured framework that clearly shows the assets against the liabilities, which allows them to make better investments," Horan explains.
Wirehouses May Want To Tap Indie Trend
(Dow Jones) The big brokerages don't want to make independence their main business, but some industry experts say it would be profitable for them to tap into the breakaway movement.
Of the three biggest brokerages, only Wells Fargo Advisors has an independent channel that its brokers, along with others, can join if they decide to leave the wirehouse model. That channel, FiNet, sprung from a 2001 acquisition of a Florida-based independent brokerage, J.W. Genesis, that eventually came to Wells Fargo after a string of acquisitions. Morgan Stanley Smith Barney and Merrill Lynch have no such option.
Merrill Lynch does have a registered investment advisor, or RIA custody business for money manager services, but it is not actively growing that business, and its employee advisors can't move to that channel. Representatives from Merrill Lynch and Morgan Stanley Smith Barney declined to comment on whether they have plans for an independent outlet for their advisors.
One Morgan Stanley advisor in the South says he knows why the wirehouses don't make the move. "They don't want to give that many people that kind of freedom," he says.
Some observers believe it could be worthwhile to do so because it would add more volume to the clearing arms of the firms, which would spread out their costs and essentially be profitable for them.
An independent channel would also enable a wirehouse to keep a good advisor who decides to go independent in-house. Well Fargo Advisors says that since 2006, about 100 advisors have moved from its employee channel to FiNet, which has about 825 total advisors.
Were Merrill Lynch and Morgan Stanley Smith Barney to decide to create their own versions, they would have to find a way to "enable the world of independent brokers with the wirehouse capabilities without diminishing [the wirehouses'] current competitive advantage of having the best offerings out there," said Doug Dannemiller, brokerage and technology analyst at Aite Group.
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