Hypersensitivity to fraud in the post-Madoff investing world means due diligence uber alles. It’s nice to find a partner or third-party vendor on which an advisor can rely to flag questionable behavior before it turns into something more. It could be an outside company, a broker-dealer’s compliance department, or the advisor’s own internal review.
But how about combining all three? Redundant, yes, but like safety mechanisms on an airplane, it’s probably something with which few investors would argue.
William (Bill) Bestgen, ChFC, AIF, AEP, of Bay Financial Associates in Waltham, Mass. has just that: a Commonwealth Financial Network rep who takes full advantage of the firm’s association with Chicago-based Envestnet to screen SMA managers before subjecting it to his own rigorous due diligence process.
“I was just speaking with the folks at Envestnet, and what they said tracks with what I’ve been seeing,” Bestgen says. “The hiring of third-party SMA screeners by broker-dealers to do the legwork is the wave of the future. If something is going wrong, they’re off the platform almost immediately.”
Not that Commonwealth simply accepts Envestnet’s recommendations as gospel truth. As Bestgen notes, the broker-dealer will accept a list of quality SMA managers from the firm and subject it to its own internal analysts, who then pare the list even further.
“It’s very comforting for myself and my clients to have those two levels of due diligence before it even reaches my desk,” he adds.
But the relationship goes far beyond due diligence. As Bestgen notes, proper asset allocation is what drives the investment engine, yet how is it done with smaller accounts? Proper asset allocation is difficult to come by with some SMAs unless it’s on the order of a $15 million account.
“Envestnet has a minimum as low as $100,000,” he says. “So a smaller $1 million account or a $1.5 million account can still get allocated across all asset classes properly.”
In general, Bestgen likes the fee, tax and return potential SMAs have to offer, something he believes is far superior to standard mutual funds.
“The frustrating aspect of mutual funds is that when the herd is moving in the wrong direction—as it so often does—mangers have to sell to afford the redemptions, which of course makes them incredibly inefficient. Your clients are then penalized even if they bucked the herd mentality and are trying to do the right thing. Simply put; that doesn’t happen with SMAs.”