Unlocking Real Value Blog

What are Advisors Thinking Today?

IMCA’s latest Research Quarterly contained some interesting results from three surveys that Cerulli Associates conducted with IMCA members. The surveys include data that span a three-year period – 2008-2010 – so the results reflect both pre- and post-crisis attitudes. (While the survey included advisors as well as other industry participants, I’m going to focus on advisors in my comments.)

1) Advisors are increasingly questioning the validity of modern portfolio theory. This has caused many to do two things – a) gravitate more toward tactical asset allocation strategies and b) turn increasingly to alternative investments. The survey results indicate that money has been pulled from sponsor-managed accounts (i.e., SMAs and UMAs) into advisor-managed accounts (i.e., rep as portfolio manager) to increase flexibility and allow for more tactical switches. This trend seems dangerous to me, and could actually benefit advisors that stay the course and don’t try to manage the money themselves (unless part of a team where they are the investment specialist). And while a believer in alternatives in theory, many clients don’t understand them – advisors need to be careful not to move clients into investments that they don’t understand.

2) The percentage of advisors utilizing individual securities increased from 16% in 2008 to 28% in 2010. This trend scares me as well. Again, the previous trend had been for advisors to position themselves as the relationship manager, and leave the management to others – witness the growth of the managed accounts area overall. Increasing an advisor’s role in the investments purely as a response to the markets seems dangerous to me, especially if it signals a change in business philosophy. Are clients better served? Are these advisors in fact opening themselves up to lose clients?

The messages here? For those advisors that are switching their philosophies because of the markets of the past three years – be careful that you don’t disrupt your business models unnecessarily and set your business back. For other advisors – target the clients of those advisors that are making wholesale changes. Emphasize your process, consistency and continue to deliver as you have in the past. I think this latter group of advisors will prove to be the long-term winners.

One Response to “What are Advisors Thinking Today?”

  1. Jim Cannon says:

    Could not agree with you more, Andrew! If I had a $100.00 for the number of times I’ve heard this sentiment from advisors in the past two years, I could buy a luxury car for Christmas this year. While there is clearly merit to alternatives, tactical strategies and non-correlated asset classes for diversification purposes, loading up on one or even of few of these styles, as many advisors seem to want to do, seems to be a path to future disappointment. There are some advisors who have developed strategies that are very compelling, but most are following untested models and the results will likely be very mixed. Furthermore, given the transition of wealth management practices that will likely occur over the next several years, advisors should be considering sound, tested portfolio management approaches that can be institutionalized when it comes time to sell all or a part of their business. I have to believe that advisors that are true to a proven discipline and process will cash the bigger checks in the future.

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