financial services, financial consultant, financial advisor, investments, investment management, management, consulting, investing, investments, assets, financial advice, advice, fee base, fee based, brokerage, commission, stock, stock broker, mutual funds, etf, folio, pmer, steve winks, srconsultant, srconsultant.com
 
     

Sponsored by:
The Consultant's Toolbox
Process and Technology

The six financial service prudent investment (asset study, investment policy, strategic asset allocation, manager search and selection, performance monitor and tactical asset allocation) process required by UPIA, ERISA and MPERS provides the structural framework through which the financial advisor is empowered to add value. These six financial services are:

1.   Asset and Liability Study
2.   Investment Policy
3.   Strategic Asset Allocation
4.   Manager Search and Selection
5.   Performance Monitor
6.   Tactical Asset Allocation

1. Asset and Liability Study

Quick Toolbox Links:
Professional Development
Process and Technology
Practice Management
Investment Products
Consultant's Toolbox Home Page
Advisor Tools and Resources:
Sponsored by:
We need to do a better job in getting information to advisors so that they can counsel their clients in a more timely manner. PIPODs do this.

Brought to you by PPCA, Inc.
Free Desktop Version of PIPODs Available!
Download desktop PIPODs now.


Buy the latest universes for accurate, timely PIPODs performance rankings now
.

To learn more about PODs and PIPODs, read:

  Leveraging Through Technological Advances to Make Better and More Timely Decisions
  A Virtual Reality Without Peers
  Evaluate Skill, Not Style
  Testimonials for Popular Index Portfolio Opportunity Distributions (PIPODs)
  PIPODs: Unifying Best Practices for More Timely, Relevant and Accurate Investment Performance Evaluations

The asset and liability study is central to the thesis of adding value because only by evaluating an investment recommendation in the context of all the client's assets and liabilities is it possible for one to determine if it increased overall portfolio return, reduced risk or improved tax efficiency, liquidity and/or cost structure. Many firms, notably Merrill Lynch, Wachovia Securities and Salomon Smith Barney can report via the web on all assets custodied in-house. Yodlee and Kinexus, the two leading account aggregation firms, can deliver aggregated asset and liability information on a client's accounts from all sources but cannot provide analytical tools which manage aggregated account information in terms like overall portfolio risk, return, tax efficiency, etc., useful for advisors and their clients. Leading firms like Merrill Lynch are developing electronic asset and liability study capability which can establish the returns that clients or prospective clients have actually achieved in all their accounts, the risk the client has assumed, the tax efficiency, liquidity and cost structure of all their assets and liabilities, whether custodied at Merrill Lynch or not.

Best-in-class electronic asset study capability is made feasible by screen scraping technology, pioneered by Yodlee, and live custodial links, pioneered by Advent and Kinexus, which provide aggregated account information. Separate analytical tools are required to translate the aggregated account information in terms of risk, return, tax efficiency, liquidity and cost structure to facilitate an electronic asset/liability study capability which would diagnostically evaluate a prospective client's assets automatically, greatly reducing the labor intensity of high level advice. In a similar but different vein, Dain Rauscher has developed an electronic means of classifying all client investments by their holdings which accurately establishes the performance characteristics of each investor's portfolio.

Because of the relatively small number of advisors using an electronic asset and liability study capability made possible through account aggregation technology, there are no capacity issues in its execution. However, if every advisor at Salomon Smith Barney or Merrill Lynch wanted to aggregate all their accounts, both assets and liabilities, so they can provide an electronic asset and liability study for all their clients as of the end of each prior business day, there would not be enough bandwidth to move all that information in a timely manner. There is simply too much data, and the disk-swap speed between storage and processor today is inadequate to accommodate such a massive flow of information. However, both the bandwidth and disk-swap speed issues will be resolved within the next 18 months as a normal course of technological evolution. Thus, the electronic asset and liability study, which makes it possible to establish if value is being added should be used pervasively within leading firms within the next 36 months. Advisors and firms not prepared to address and manage a broad range of investment and administrative values over the next 36 months will be vulnerable to those that can clearly demonstrate the values they address and manage.

Charles Schwab will introduce in March 2002, their advisor-branded web sites in which it will serve as host. The advisor-branded web site will provide and electronic asset/liability study capability for the 3,300 independent Schwab advisors that have more than $100 million in assets. The asset/liability study will allow Schwab's advisors to clearly delineate the depth and breadth of investment and administrative values they address and manage, and the value they add. Thus, Charles Schwab has best-in-class asset/liability study capability. (See, Investment Process: The Asset Study, Senior Consultant, April 1998.)

Best-In-Class
Asset/Liability Study:

Charles Schwab

2. Investment Policy

Quick Toolbox Links:
Professional Development
Process and Technology
Practice Management
Investment Products
Consultant's Toolbox Home Page
Advisor Tools and Resources:
Sponsored by:

Brought to you by PPCA, Inc.
Free Desktop Version of PIPODs Available!
Download desktop PIPODs now.


Buy the latest universes for accurate, timely PIPODs performance rankings now
.

The heart and soul of the investment process is investment policy which establishes the role of the client, the advisor and the money manager; defines the client and their objectives in very specific terms; and translates that client definition into an investment strategy and an investment portfolio. It establishes a corporate consciousness of the client's wishes and documents the services to be provided by the advisor to include when money managers should be engaged or terminated. Rowe Decision Analytics provides best-in-class institutional quality investment policy for the high net worth, ultra high net worth, defined contribution, defined benefit, foundation and endowment, public funds, profit sharing and Taft Hartley markets, which translates into 36 different policy statements with unlimited customization while providing legal opinions that opine that policy and the resulting investment portfolios are in compliance with UPIA, ERISA and MPERS. Notwithstanding that the best policy statements are totally custom documents designed specifically for each client, most consultants do not have the time or ability to sufficiently charge for the hundreds of manhours required to create such a custom document to make it economically viable. With Rowe Decision Analytics, 80% of the work is done. The consultant only has to modify 20% of the document, saving both time and money. Thus, institutional quality policy capability offered by Rowe Decision Analytics that allows for a high degree of customization, yet also provides a legal opinion that places it compliance with regulatory mandates, makes it economically viable for the consultant to deliver high level, comprehensive, expert advice. (See Creating a Statement of Investment Policy, Senior Consultant, August 1998 and Investment Policy: The Heart of Consulting, Senior Consultant, May 1998.)

Best-In-Class
Investment Policy:

Rowe Decision Analytics

3. Strategic Asset Allocation

Strategic asset allocation presumes if you can define the investor in terms of risk, return, tax efficiency, liquidity and time, and you can define the investments in the same terms, based on the historical performance characteristics of asset classes, one gains a mechanism in which to construct portfolios which would achieve the client's objectives. In 1986, a Brinson, Hood & Beebower study found that 93.6% of investment performance was determined by the configuration of asset classes in which one chooses to invest. Recent studies by Ibbotson (2001) found 40% of the returns realized in two investment portfolios can be explained by to the configuration of asset classes in which investments were made. Ibbotson makes strategic asset allocation and the establishment of an investment strategy far more dynamic than the long-term strategic positioning of assets previously postulated by modern portfolio theory. Thus, the role of the financial advisor and tactical adjustments in asset allocation are today much more central to investors achieving outstanding performance. Yet, tactical asset allocation uses strategic asset allocation as a reference point from which tactical adjustments are made. Strategic or passive asset allocation has increasingly become a commodity which can be obtained by advisors and their clients for free from many sources. Ibbotson Associates offers the most progressive thinking and tools on asset allocation and are considered best in class. (See Investment Policy: The Heart of Consulting, Senior Consultant, May 1998.)

Best-In-Class
Strategic Asset Allocation:

Ibbotson Associates

Quick Toolbox Links:
Professional Development
Process and Technology
Practice Management
Investment Products
Consultant's Toolbox Home Page
Advisor Tools and Resources:
Sponsored by:
We need to do a better job in getting information to advisors so that they can counsel their clients in a more timely manner. PIPODs do this.

Brought to you by PPCA, Inc.
Free Desktop Version of PIPODs Available!
Download desktop PIPODs now.


Buy the latest universes for accurate, timely PIPODs performance rankings now
.

To learn more about PODs and PIPODs, read:

  Leveraging Through Technological Advances to Make Better and More Timely Decisions
  A Virtual Reality Without Peers
  Evaluate Skill, Not Style
  Testimonials for Popular Index Portfolio Opportunity Distributions (PIPODs)
  PIPODs: Unifying Best Practices for More Timely, Relevant and Accurate Investment Performance Evaluations

4. Manager Search and Selection The advance of modern portfolio theory has brought with it the need for more disciplined, investment management style-specific, forms of asset management. Because fee-based advisors are required to disclose the cost of investment vehicles as well as their fees for providing counsel in portfolio construction, the cost to the investor of engaging professional investment and administrative counsel is a function of the cost of the advisor's services and the embedded cost structure of the investment vehicles used. The average, all-encompassing consulting fee is 178 basis points, but with the average mutual fund having a cost structure of 138 basis points, plus trading cost of an additional 100 basis points or more (which is not disclosed by prospectus), the typical conventional mutual fund has been priced out of the advice market. The 200-250 basis point cost of the mutual fund leaves little or no room for the consultant, who is adding all the value, to price their services. Thus, managed accounts at 50 basis points, and folios and exchange traded funds (ETFs) at 15-30 basis points have become very important portfolio construction tools, as they provide more latitude for the consultant to price their services and they better approximate specific investment management style and/or sector mandates around which portfolios are constructed. As a result, there is a structural bias for managed accounts, folios and ETFs, because they are more sophisticated forms of investment, ideally suited for portfolio construction.

It should be noted that a new generation of style specific mutual funds pioneered by SEI Investments and structured like managed accounts are becoming very popular for financial advisors. This next generation of mutual funds actually goes further than the traditional asset management functions performed by a money manager. SEI actually assumes fiduciary responsibility for designing and building portfolios which will achieve the client's objectives.

In another approach to managing fiduciary responsibility, InvestMGT has created proprietary performance indexes geared to client objectives and has modeled multi-manager mutual fund portfolios similar to Frank Russell based on those indexes as a means to cost effectively achieve custom portfolio construction against the appropriate index for each client. Rather than going through a complex procedure to pick the appropriate configuration of money managers who would accomplish the client's objective, InvestMGT goes through a less complex procedure to pick indexes that would best describe the client's objectives. InvestMGT has also created a tool that extracts data from the three mutual fund data bases they use and maps that data to a fiduciary due diligence process which generates a one-page report that evaluates any mutual fund against mandated fiduciary responsibility and due diligence criteria. InvestMGT is creating the same capabilities for managed accounts. Thus, today it is possible to easily work within a role as a fiduciary to construct investment portfolios, resolving the issue of whether one assumes fiduciary liability or not. This allows those advisors who acknowledge the fiduciary responsibilities incurred within the defined role and capacity of the consultant as outlined in the statement of investment policy to more fully price their services.

Manager search and selection is more than just gaining access to the raw data in the CompuStat, MobiŁs, Northfield or MorningStar databases. Prima Capital has created a completely outsourced due diligence and research function for managed accounts and mutual funds and will soon add exchange traded funds. Prima is widely acknowledged as being best in its class as evidenced by its impressive client list. Its web-based manager search and selection platform which provides a comprehensive quantitative analysis to include holdings and returns-based attribution analysis, qualitative analysis, an objective 13-factor factor ranking of managers and an opinion on and accountability for each manager recommendation. Institutions using Prima Capital can shift the weightings of the 13 factors that rank managers to reflect their own thinking and each client's unique circumstance. Thus, manager search and selection by design incorporates each user's proprietary methodology, resulting in a custom outsourced manager search and selection process for both institutional clients and their practitioners. For example, tax efficiency has a zero weighting for qualified plans but a high rating for high net worth individuals. Because Prima is web-based, institutional users provide all their advisors direct access to very powerful analytical tools for manager search and selection to help shape their professional investment counsel.

Because Prima is built around a relational database, its institutional users can use Prima information and analysis to create custom reporting and documentation, or for packaging of any end-product they wish. Thus, Prima provides broad-based access to very sophisticated outsourced manager search and selection analysis in a form that reflects the user's own unique perspective. This is what makes Prima the best in its class for manager search and selection. Prima is structured for financial services professionals working the middle market (between $100,000 and $10 million in investable assets). For the investors with more than $10 million investable assets, Salomon Smith Barney has distinguished itself in managed account research, developing extraordinary capability that arguably makes them the best in the business in managed account research and due diligence, to include the largest institutional consulting firms. Yet, because that information is only actively used at the higher end of the market by several hundred Salomon Smith Barney senior investment consultants who have built their practices around it, Salomon Smith Barney's brilliant research has limited market access but must also be considered best in class. Because of access and technological considerations, Prima Capital, for most advisors in the general advisor population, is the best-in-class resource for manager search and selection. (See Investment Policy: The Heart of Consulting, Senior Consultant, May 1998.)

Best-In-Class
Manager Search and Selection:

Prima Capital
and
Salomon Smith Smith Barney

5. Performance Monitor

Quick Toolbox Links:
Professional Development
Process and Technology
Practice Management
Investment Products
Consultant's Toolbox Home Page
Advisor Tools and Resources:
Sponsored by:
We need to do a better job in getting information to advisors so that they can counsel their clients in a more timely manner. PIPODs do this.

Brought to you by PPCA, Inc.
Free Desktop Version of PIPODs Available!
Download desktop PIPODs now.


Buy the latest universes for accurate, timely PIPODs performance rankings now
.

To learn more about PODs and PIPODs, read:

  Leveraging Through Technological Advances to Make Better and More Timely Decisions
  A Virtual Reality Without Peers
  Evaluate Skill, Not Style
  Testimonials for Popular Index Portfolio Opportunity Distributions (PIPODs)
  PIPODs: Unifying Best Practices for More Timely, Relevant and Accurate Investment Performance Evaluations

The virtual real-time balance sheet and income statement is not here yet, but we are getting close. The intranet and straight-through processing will ultimately facilitate real-time information on publicly traded securities, yet there has been reticence on the part of the insurance and mutual fund industry to make real-time holdings, return, risk and cost structure information transparent to the investor. Thus, individual securities, managed accounts and folios will account for the vast majority of all investable assets as investors require more accountability and transparency. The cash balance and liability side of the balance sheet is available through commercial banks but batch processing does not lend itself to real-time data, resulting in a four-hour to one-business-day delay in information. Privately held assets, like private equities, real estate or personal property are evaluated at the discretion of the investor in the frequency they wish. Thus, it is possible today to report on all the client's assets and liabilities as of yesterday, which is a significant advancement to just reporting on a series of disjointed, unrelated transactions where it is not possible to add value as is common in commission brokerage. Best-in-class performance monitors, which incorporate all the client's assets and liabilities and based on yesterday's data, are being provided today to a very small user base of consultants at Salomon Smith Barney and Merrill Lynch for a very small group of very high end clients. These state-of-the-art performance monitors incorporating the asset and liability side of the client's balance sheet will be democratized over the next 18 months as bandwidths and disk-swap speeds allow. This level of performance reporting is essential for advisors to add value. Thus, within the next 18 months, both firms and advisors must align themselves with the thesis of adding value or run the risk of becoming a high cost/low value option for trade execution.

Charles Schwab has announced its advisor-branded web sites to be introduced in March 2002, which will empower advisors to develop a totally custom web site, hosted by Schwab, that will report on all the client's assets and liabilities. Money managers and PMers using Schwab can report on the assets they manage in real-time. The web site will have a "virtual vault" where wills, buy-sell agreements, trust documents, tax returns, investment policy statements, etc. will be securely housed with access being controlled by the investor citing authorization to specific documents when needed. Because the advisor brands their own web site with content of their choice, they will have their sales and marketing materials, their unique value proposition, their process, client's reporting and ADV on-line. They can even have webcasts with their clients. The advisor-branded web site offered by Schwab is best in class in performance reporting as it will accommodate the most robust form and content of reporting possible.

The richness of the detail and the values quantified in the performance monitor ultimately determines the level of discernment and the quality of the investment and administrative counsel provided. Thus, the art of the performance monitor is to provide very sophisticated science-based insight in an understandable way that clients would appreciate. Client's don't need to know how to make a clock, they just want to know what time it is. How we evaluate and explain performance and risk is central to the responsibilities of the financial advisor.

Performance attribution analysis takes the consultant and their clients deep into why the client's portfolio and the investment managers engaged perform as they do, evaluating whether performance is attributable to skill, luck and/or style. This type of indepth attribution analysis represents an extraordinary differentiating skill set for the consultant. Attribution analysis is an strategic imperative for advisors who wish to offer high level, comprehensive, expert advice. There are several returns-based attribution analysis tools available, but there are limits as to what you can do with returns-based attribution analysis. There are only a few firms which offer holdings-based attribution analysis and only one that evaluates the impact of investment management style and does so at one-fifth the cost of many of its competitors. PPCA's StokTrib is the best-in-class attribution analysis as it offers holdings-based, style adjusted attributed analysis. Nobel laureate Bill Sharpe formulated what we now know today as attribution analysis and its commercial application was pioneered by Zephyr which has the largest installed base of 400 licensees and nearly 2,000 users, 100 of which are at Salomon Smith Barney. Zephyr has made many innovations that have made it easier for more advisors to use attribution analysis and in doing so, has greatly elevated the financial services industry. Because of its continued innovation, Zephyr also has to be considered best in class.

One of the major differences between individual and institutional investors is how we explain and measure risk. Mean variance is used in the institutional market to measure risk because institutions have an unlimited lifespan and over an extended timeframe will approach median return and risk as espoused in modern portfolio theory. But individuals with a finite lifetime do not have the luxury to use time to mitigate risk. Thus, for individuals we must use a different measure of risk that more accurately reflect the arbitrary and volatile nature of the capital markets in shorter timeframes. Monte Carlo simulation is the best way to illustrate risk for individual investors, except those with ultra high net worth or sufficient assets that would far exceed the intergenerational needs of their grandchildren's children and/or a 50+ year time horizon. For most individuals, Monte Carlo simulation best describes the risk and returns they should expect to achieve over their lifetimes. Best-in-class Monte Carlo simulation is offered by Financeware which helps investors and advisors understand the probability of their achieving their long-term goals and objectives. Attribution analysis and Monte Carlo simulation are essential for consultants who wish to offer the highest level of investment and administrative counsel. (See Putting Monte Carlo Simulation Into Practice, Senior Consultant, March 2000; Investment Process: The Performance Monitor, Senior Consultant, July 1998; Bullrun Financial Makes a Multi-Generational Leap in Innovation in Portfolio Construction Technology, Senior Consultant, May/June 2002.)

Best-In-Class
Performance Monitor:

Charles Schwab

Best-In-Class
Attribution Analysis:

PPCA and Zephyr

Best-In-Class
Real-Time Attribution:

Bullrun Financial

Best-In-Class
Risk Diagnostics:

Financeware

6. Tactical Asset Allocation

When current market conditions contradict historical precedent, such as when fixed income returns exceed equity returns, tactical asset allocation better aligns the client's portfolio with the forces at work in the market. In recent research by Rowpyn and confirmed by the University of Chicago, it has been found that shifts in investment management styles (from value to growth, or from small cap to large cap stocks) do not occur hour to hour, day to day or even month to month, but it occurs over time spans that could be as long as four to six years. Thus, relying on actual market experience without arbitrary judgement (i.e., without market timing), if one can determine when the shifts in management styles occur, it is no longer necessary to be exposed to an underperforming management style for more than six months. Thus, by definition, Rowpyn's investment methodology would outperform index returns as long as style shifts persist for periods of six months or longer. Best-in-class, science-based investment methodology or tactical asset allocation is the Rowpyn Equity Investment Rotation Model which has generated 26.44% returns at less risk than the S&P 500 at 13.38% over the past five years (See Investment Methodology, The Holy Grail of Consulting, Senior Consultant, September-October 2001 and Tactical Asset Allocation, Senior Consultant, August 1998.)

Best-In-Class
Tactical Asset Allocation:

Rowpyn

[Return to the Top]