Why More Advisors Are Using Strategist Portfolios

This frees up time for advisors to work on other client services, such as financial planning.

Advisors who decide to go the third-party route need to understand that they no longer have discretion over the portfolio or any of its trades; that power lies with the third-party strategist, according to Friederich.

If advisors are comfortable with that arrangement, then they should match strategists with their own preferences for managing portfolios — mutual funds or ETFs, or a combination of both, for example — as well as the client’s preferences — sensitivity to costs, risks, taxes as well as goals, whether they favor income over capital appreciation or capital preservation, said Friederich. There are no style charts available for strategist portfolios and no basic benchmarks against which advisors can gauge the performance of one strategist portfolio or firm against another.

Advisors can then choose between big asset management firms like BlackRock, Vanguard or Fidelity, who will create a strategy comprising their proprietary funds for a low cost, between 10 and 30 basis points, or they can choose a strategist firm that creates portfolios including ETFs and/or funds from a variety of asset managers. Those strategist portfolios will be costlier, roughly between 30 to 50 basis points for passive portfolios and more if they include active funds, but all typically charge less than 100 basis points, or 1%, said Friederich.

Here are some more factors advisors should keep in mind when choosing to go the strategist route to outsource some or all of their investment management services:

• Most strategist portfolios generally use index ETFs and/or mutual funds, but actively managed funds or subadvised funds can be included as well.
• These portfolios include major asset classes such as stocks and bonds as well as alternatives and multi-asset portfolios; some include quant strategies in addition to more traditional strategies, which can be long-term and fundamental or short-term and tactical.
• Several of the strategists on the Envestnet panel used terminology that blurred the lines between active and passive, indicating that they actively choose the passive investments they use. John Forlines, chairman and chief investment officer of JAForlines Global, said his firm was an “active indexer”; Gary Fullam, chief investment officer of Globalt Investments, described his firm as an “active manager using passive vehicles.”
• In addition, some strategists use cash as a separate asset class, not just as a temporary placeholder, when deemed necessary due to market conditions. Fullam said his firm considers cash a “ranked asset class” that can run as high as 50% in strategist portfolios.
• Like most other portfolios, strategist portfolios are usually differentiated along the conservative, moderate and aggressive continuum; some are more focused on growth; others more on downside protection or a combination of both. Advisors should choose the portfolios that best fit their clients’ goals.
• Strategist portfolios may be available for advisors to white label and market under their own firms’ name.
• Fees among strategist portfolios vary along with their tax efficiency, which can both affect performance. “After-tax, after-fee returns are extremely important,” said D’Amico of Braver Capital Management, adding that the tactical portfolios especially have less ability to limit taxes and may be more suited to tax-free accounts.

— Check out Lucky 13? For These SMA Managers, Luck Had Nothing to Do With Their Success on ThinkAdvisor.