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. 

With over 47,000 advisors on Envestnet’s platform, we were able to look back and examine advisor behavior to test my theory—our own version of MythBusters, if you will. We looked at advisors who were the top users of unified managed accounts (UMAs) for large accounts (those greater than $1 million), and compared the growth rate of those advisors’ firms to the population not using UMAs for larger accounts.  

The growth rates were drastically different, with the heavy users growing 20% while the non-users remained flat. 

We then flipped to the smaller end to see if the theory held true for smaller accounts. We looked at advisors heavily using third-party, fully allocated products for accounts under $100,000, and compared that population to advisors constructing portfolios on their own or using other managed account vehicles for those smaller accounts.  We found that this theory held true here too, with these advisors growing just under 20% while the “do-it-yourselfers” grew only 4%.  

The bottom line? We learned from studying the data that vehicle selection by asset size for these two very important client segments actually drove growth.  We also learned that advisors who decided to outsource investment management were able to spend more time with clients and demonstrate a level of value to clients that far exceeds their competition, as reported in our January 2016 Envestat report, Decision-Making Business Intelligence [1].  These advisors are “minding the store,” but they aren’t counting the cans on the shelves.

Instead, they are walking around the store, welcoming customers and asking them to refer their friends and, thus, growing their businesses. 

Author’s disclaimer: 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. This paper may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.