Yes, Investment-Vehicle Selection Affects Firm Growth

If I had a dollar for every time I heard, “Jay, I need to make all of the investment decisions for my clients, because that’s what they are paying me to do,” I’d be retired. As someone who used to run an RIA, I understand the tough decisions related to where a firm or practice should allocate time, and how they play into a firm’s value proposition for clients. 

Through my own experience, and as I visit more firms, I find the most challenging balance involves how to allocate time spent in three key areas: managing investments, serving existing clients and developing new client relationships.  Most advisors started their practices because they thought they could do something better, more efficiently or less expensively than the competition. For many advisors, that “something better” was hands-on, active investment management.  It’s what makes them “unique.” 

In future columns, I would like to dig into whether or not a firm’s value proposition surrounding investment management is really a winning hand for the future.  However, in my first post I want to address one simple question: does the investment vehicle a firm or advisor chooses for clients based on their asset size actually impact growth?  

This question alone may surprise some readers because many advisors don’t even consider tailoring their choice of investment vehicles to client asset size. Their investment philosophies are so strong that they may end up adopting a one-size-fits-all approach that says all clients should be in individual stocks, mutual funds, ETFs, etc.  

I’ve always believed vehicle selection matters. It not only involves matching the right vehicle to the needs/goals of the client, but it also impacts how a firm operates and whether an operation can scale. 

Some firms don’t see the connection.  Many firms miss opportunities to scale their practices, not only based on technology or personnel decisions, but also because their one-size-fits-all approach to the selection of investment vehicles causes them to spend time inefficiently.  Experience has taught me that:

• Small accounts should be in fully allocated products managed by third parties, which saves advisors time.   

• Larger accounts should be in vehicles where tax efficiencies can be realized, and trading and rebalancing are easy.  

By taking this approach, the client not only receives a better outcome in most cases, but the firm can also gain operational efficiencies and spend more time with clients dispensing advice versus actually implementing the advice—a service for which clients don’t care to pay. 

I always believed that firms allocating this way would grow faster, but I never had a way to validate that theory directly until I joined Envestnet and was able to mine a virtual treasure trove of advisor data.