Last week I discussed some of the benefits of outsourcing the asset management component of an advisor’s business (When Outsourcing Investment Management Makes Sense). I mentioned in the blog that while outsourcing often makes sense, there was a small wrinkle which I would touch on this week.
Outsourcing part or all of one’s asset management business is an important decision for any advisor. In my last posting, I discussed the expense of outsourcing and how it can reduce your revenue unless you raise your clients’ fees. Moreover, it is influenced by a number of factors, including the need to be in control and the desire to do my own research and actually manage assets.
Both of these issues are important to me.
On the control front, I have always been concerned that if the markets were to plummet again, as they did in 2000 and 2008-2009, I would like to know that the asset manager will not just let the accounts decline, sticking to the model’s allocation. In short, I’d like some assurance that the manager is going to do whatever possible to minimize losses.
The particular separately managed account I’m considering took that prudent course in 2008. Specifically, the managers reduced their stock exposure a bit, down closer to 30%, but invested heavily in long-term government bonds, one of the few asset classes that did well that year. As a result, it ended the year with a negative 5.50%, which is not too bad considering the financial markets nearly collapsed.