Financial advisors who regard their investment management strategies as a commodity do so at their own peril. Investment management is one of the nine winning tactics of successful financial advisors, according to a new report from Tiburon Strategic Advisors.
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In the third of an occasional series on that report, we spoke with Charles “Chip” Roame, managing partner of Tiburon Strategic Advisors, about the investment management strategies and his thoughts on what the future holds.
By way of background, the second report was Financial Advisors Do a Poor To Average Job At Sales And Marketing: Chip Roame. The first report examined the topic of target marketing.
A4A: In the report, you say that "investment management strategies" is one of the nine winning tactics for financial advisors? Why is that? Is investment management really a point of differentiation or is it a commodity?
Roame: One on hand, yes, investment management is becoming a commodity. On the other hand, it is an area of rapid evolution. Strategic asset allocation has been challenged. Tactical asset allocation, behavioral finance, portfolio construction using alternatives using alternatives, and even asset-liability management are all trends in investment management.
A4A: You mention that there is likely to be growth in behavioral finance. Why is that and what do you recommend that advisors do because of that? Become more expert in behavior finance?
Roame: Becoming more expert is probably an overstatement, but yes to some degree. I’d say this, as markets have been more correlated and more volatile, leaving fewer places for conservative investors to hide, financial advisors’ understanding of their client’s needs and related behavioral finance issues is increasingly important.
A4A: According to the report, there is likely to be growth in tactical asset allocation. Why so? And, what should advisors do given that? Become more proficient with this strategy?
Roame: No, it’s the other way around. Financial advisors are leading this trend, not following. Understanding ways to apply tactical allocation is a valid goal; some may want to do it themselves while others will rely on programs such as the ETF Tactical Asset Allocation program at Envestnet PMC.
A4A: According to the report, there is likely to be growth in portfolio construction, alternative investments, and endowments. Why is that? And what should advisors do given that prediction?
Roame: This is driven by the search for non-correlated asset classes. Endowments have long been substantially invested in alternatives. Like almost investment trends (asset allocation, international investing, and index investing), trends start in the endowment world, move to the defined benefit plan world, and ultimately to the financial advisor and consumer world.
The endowment model (use of alternatives) is on this path with growing acceptance at the financial advisor level.
A4A: The report also suggests that there is likely to be growth in risk budgeting, risk parity, risk control, and asset-liability matching model. Again, why so and what should advisors do because of this?
Roame: This is related to the behavioral finance trend. If a consumer needs $x to retire or to live happily ever after, why worry oneself with the return of some index such as the S&P 500? Who cares? What a consumer implicitly cares about is the ability to fund their liabilities (e.g. their summer vacation, kid’s college, vacation house, and retirement, for example). Slowly, slowly, slowly the world is moving this way, where comparing one’s return to some market index is less important.
In the next report, we’ll talk to Roame about the fourth winning tactic, client service strategies.