It’s no secret that escalating regulatory and business complexity is intersecting with the need for financial advisors to deepen their engagement with each client to understand thoroughly the client’s financial needs.
Among other things, this means it’s increasingly crucial for advisors to treat long-term portfolio construction as an ongoing, flexible and iterative process—as opposed to a one-time, static exercise, revisited once or twice a year to conduct routine rebalancing at most.
Cutting through all the industry noise, long-term portfolio construction that truly supports the achievement of client financial goals should be guided by the following top three tactical considerations:
1. Are you approaching portfolio construction as a one-person generalist, or do you incorporate the viewpoints of other experts into the process? Some of the strongest portfolios that put clients in the best position to achieve their goals tend to be the product of an ongoing, collaborative development process between the experts in a broker-dealer's home office and its advisors. Such a continual and consultative approach allows both advisors and home office experts to test each other’s assumptions in an ongoing search to identify and incorporate the best managers and products, to review the outcomes of previous product selections and allocation choices, and reduce risk wherever possible.
Broker-dealers can contribute to their advisors’ success in this area by making multiple functional experts available to advisors on an ongoing basis, especially experts in portfolio construction, due diligence, and complex financial planning issues.
Of course, for such collaborative processes to work, advisors and home office teams need to understand from the start that no portfolio is a final product. Keep the lines of communication open between the advisor and the home office for the life of the account, and revisit portfolios regularly to ensure that asset allocations continue to serve the needs of clients.
2. Are you approaching portfolio construction to factor in potential avenues for reducing risk for your client? An advisor typically seeks to construct a set of portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. But even though an advisor may identify one possible point on this “efficient frontier” to optimize risk against a given set of client criteria, this doesn’t automatically mean the advisor has found the right solution.
By conducting in-depth scenario analysis, or by moving pieces of the portfolio around in different ways to see how they impact overall long-term risk and return characteristics, advisors and managers may be able to find paths to further reduce risk while still achieving a client’s objectives in various market scenarios.
In particular, advisors should keep in mind that, in many cases, it is only after they see individual components or strategies working together within a portfolio that the actual benefits or shortfalls of the different investments become apparent, even if they have analyzed these strategies or products thoroughly in the past.
3. Are your technology and analytical tools keeping pace with the times? Independent advisors and the firms that support them are under greater pressure than ever to demonstrate dexterity in aligning managers and investment products with the financial goals of the advisors’ clients. With that in mind, independent broker-dealers should review the adequacy of their technology platforms to ensure that both home office teams and advisors are able to construct and stress-test robust portfolios across the widest possible array of scenarios, and on a scalable basis.