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Portfolio > Asset Managers

Matching Clients’ Asset Location With Their Asset Allocation

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Much has been said about the science and the art of investing. There should be: it’s a complex business. In the end, though, both the science and art really serve a single objective: maximizing returns within the constraints of a client’s specific investment goals and risk tolerance.

For advisors these days, who must contend with a market that’s suddenly volatile again as well as a staggering array of investment products, that’s a pretty tall order. It can be done, though, and I humbly suggest that the best – maybe the only – way to achieve success as I’ve defined it is to look at a client’s entire portfolio from a holistic perspective.

And just what does that mean? Well, since most investors use a combination of tax-deferred and taxable investment accounts to save for their retirement, it means that advisors have to take more of a household approach to reviewing a client’s entire portfolio. What’s more, it means that an advisor must talk to clients about the assets he or she doesn’t manage as well as the assets he or she does. It’s not unreasonable to suggest that the best way for a financial advisor (FA) to be really effective for a client is to fully understand the client’s total asset-allocation profile.

It’s More Than Personal…

Running an asset allocation model on a personal account—or the FA’s portion of the personal portfolio—is simply not enough. A holistic approach will require running at least two separate models: one on the taxable investments, utilizing after-tax return assumptions, and another on the tax-deferred accounts, using pre-tax return assumptions.

In practice, the allocation process will more often than not deploy high-growth, yield and turnover assets–actively managed equities, for example–in the retirement accounts and more tax-efficient assets–municipal bonds, passive index funds and the like–in the personal accounts. It’s easy enough from there to roll up all the models into a household-level asset allocation report to get an accurate view of the aggregate portfolio.

The good news, however, is since you understand the components of return and the correlations between pairs of asset classes so well, you’ll have a good opportunity to allocate assets more efficiently between your clients’ personal and retirement accounts. The bad news?

There’s no magic formula for determining the ideal model with any kind of precision. At the risk of sounding too much like an economist, I have to say that the most appropriate solution will depend on the situation.

And It Might Be a Little Complicated…

The holistic view will, in itself, movs the entire advisory process closer to the Uniform Prudent Investor Act’s original overarching goal: Serving the best interests of the investor with a “modern portfolio theory” and “total return” approach to the exercise of fiduciary investment discretion. Frankly, I can’t think of a better way to know and serve your client than with household-level asset allocation.   

I’ll be the first to acknowledge that household-level asset allocation is a complex enough process to make any advisor’s head hurt. Discovery alone may be an extended process. But you know what? A holistic portfolio model is something your client – whether a taxable investor or a plan participant or a 401(k) plan sponsor – probably can’t do on his or her or its own, making it one of the key ways you can add real value as an advisor.

With access to advanced technologies, such as Unified Managed Account and Unified Managed Household platforms with model-management tools, a fiduciary advisor’s contribution can now be measured on the performance of the entire portfolio, with a clear eye toward achieving the client’s financial goals and objectives. 


Author’s disclaimer: For investment professional use only. Past performance is not indicative of future results. The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Information obtained from third party resources are believed to be reliable but not guaranteed. Any mention of a specific security is for illustrative purposes only and is not intended as a recommendation or advice regarding the specific security mentioned.Diversification does not guarantee a profit or guarantee protection against losses


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