Are My Investment Advisor’s Cookie Cutter Asset Mix Recommendations Hurting My Performance?

Most retail clients are very aware that the asset mix is the single most important variable in investment performance, but they would be surprised to learn that their advisors largely do not make proactive investment decisions. Active asset mix investment decisions based on projected returns for each asset class are the exception not the rule. The compliance departments have become so important that they frequently override any actual active asset mix decisions that are made. The analogy is comparable to the medical community in the US that is afraid to do some procedures that are in the best interests of the patients for fear of being sued.

Currently the asset mix decision has become even more important in portfolio returns. Equity returns have been largely negative year to date, especially in Canada where declining commodity prices have decimated the heavily weighted cyclical sectors. In addition, the probability of higher interest rates from the current very low levels does not provide for strong fixed income returns going forward. Taking into account this negative security market environment, one would expect a more proactive reduction in portfolio risk recommended by the private money managers in favour of more cash and liquid assets. It is true that some use a minimum to maximum range for each asset class to properly align portfolios with the current outlook. However, this is the exception, not the standard for most bank branches, financial planners and brokers. Many clients of these organizations continuously complain that their portfolio’s asset mix rarely changes. In fact, several clients had to complain sufficiently enough to their advisors to make some asset mix changes. These recommended changes should really be emanating from the advisor to the client, not the other way around as is often the case. High cash levels are rarely advised even on a short term basis as financial institutions do not make sufficient fees from liquid funds. From a purely monetary point of view, many financial institutions advise their clients to be fully invested to maximize their own corporate compensation in managing client portfolios. It is obvious that these organizations do not always have your best interests in mind.

In addition, private clients deserve the same type of participation in non-traditional asset classes such as hedge funds, private equity, private real estate and higher yielding senior floating rate loans that are normally only available to large pension funds. In this day and age, it would not be such a difficult task to unitize these investments into both mutual and exchange-traded funds in order to make them available to smaller retail clients.

Clients are becoming much more investment-savvy than ever before and are more impatient with legal jargon combined with flip marketing phrases. What the clients need and want is real advice that can benefit them, not simply strategies to protect their advisors’ interests only. I have seen retail client portfolios with the same asset mix throughout an entire economic and stock market cycle without any recommendations provided whatsoever. This is not management, but purely sales and adherence to strict compliance rules.

Whether your monies are managed by a bank branch, broker or financial planner, your asset mix selection will be a choice of four or five cookie cutter pie charts with titles like Income, Income and Growth, Growth and Aggressive Growth. Each of these options usually offers a range of minimum and maximum levels of cash, fixed income and equity weights.

Despite their apparent interest in your risk tolerance and time horizon, these categories are essentially created by these companies’ compliance departments to ensure that they are not sued by any disgruntled clients. Their asset mix selection are not actively managed and are solely based on assessing a client’s tolerance for market volatility combined with a review of the age and time frame before any income needs become the number one priority for the client.

Another traditional asset mix strategy still used by many advisors is to subtract your age from 100 and use this to determine your equity weight exposure. Many years ago I began to manage my grandmother’s monies when she was in her mid-eighties. If I had chosen to use the 100 less her age strategy, my grandmother’s stock exposure would have been a maximum of 15%. I decided to actively pick her asset mix, and maintained an even balance between stocks and fixed income until she went into a nursing home at the age of 103. By maintaining sufficient equity exposure, I was able to grow her capital at the rate of inflation and this greatly helped to finance her nursing home expenses when she needed it at the end of her life.

Both large institutional pension investment managers and investment counsellors have traditionally actively managed their asset mixes for their clients. It is unfortunate that this is not the norm for retail clients managed by bank branches, brokers and financial planners.

This lack of flexibility combined with frustration over high management fees and poor performance are the main reasons that the discount broker industry has flourished in recent years.

Retail clients deserve the same benefits from active asset mix strategies that large pension funds continue to receive, regardless of the type of organization managing their monies.

Peter McMurtry, B.Com, CFA, Financial Writer
peter.mcmurtry@yahoo.ca