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Are You the Player or the Coach for Your Client’s Investment Team?

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Prior to ETFs, among the greatest innovations bestowed upon financial advisors was the development of mutual funds. In previous history, picking individual stocks proved quite costly, as $100-plus commissions associated with equity trades were not uncommon. Searching for individual bonds to purchase presented their own challenges relative to size, pricing and accessibility, too. It was up to advisors to get the investment strategy right for their clients. Although likely possessing internal or external research, the advisor was still regarded as the portfolio manager from their client’s perspective. If an investment strategy was not performing well, it was a difficult undertaking to fire the portfolio manager for the client’s assets.

As the mutual fund industry began to create more investment products that made diversification easier, along with the advent of several fund analytic services and advisors’ own investment assessments, financial advisors gravitated toward their benefits. Mutual funds allowed advisors to create institutional-like portfolios by allocating to several managers individually within their own area of expertise. Advisors could now not only better diversify, but they could do so across different manager types as well. It became much easier to create a domestic portfolio with both a fundamental and a technical manager—those who would diversify their stock selection and others who would employ a very focused approach. The same process of selecting individual managers could be followed for an international equity portfolio and a bond portfolio too.

The ability to easily allocate across various managers, simply by purchasing or selling shares of the mutual fund, essentially transformed the advisor from being the investment strategy risk-taker—the player—to sitting on the same side of the table as the client. By overseeing the different managers in their client portfolios, advisors began acting more as the coach. This scenario became a great solution for clients. If changes were needed in the investment strategy approach, it wouldn’t necessarily equate to changing the financial advisor.

Then the fund industry changed. ETFs allowed advisors to be better-equipped players with the daily transparency of holdings, intra-day trading liquidity and overall efficiency that impacts costs. However, the increase of index funds and then the trillion-dollar-plus growth of the index ETF space placed advisors back in their old seat—in the player role on the other side of the table—as the only decision maker in the success or failure of their client portfolios.

Thanks to regulatory approvals, ETFs have expanded over the past several years beyond their traditional index investing approach to offer actively managed strategies, providing the advisor with more flexible investing tools to transition into a more enhanced coach’s role.

Today, advisors can build different teams of managers in a coaching capacity—including an offensive team for growth markets as well as a defensive team for declining markets. With the development of liquid alternative investment strategies, there are resources to build a specialist team as well. As the head coach, advisors can continue to monitor the performance of their team playing on the field, while at the same time develop bench strength for when the time comes to make a change in the starting lineup.

Fortunately, today’s advisors are becoming better armed because of the benefits that the ETF structure offers. There are advisors who remain players, diligently selecting beta and comfortable being ultimately responsible for their client portfolio performance. There are advisors who act as coaches, accessing portfolio managers through a modern investment structure to help build what matters most—better investment portfolios for their clients.


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