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Portfolio > Portfolio Construction

5 Ways Advisor Partners Can Balance Product Choice, Due Diligence

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Independent advisors look to their firms to empower their success. This includes everything from providing practice management expertise, to marketing support, to the most modern technology tools, along with a host of other invaluable services. Many, however, would likely say that no consideration is more important than having a reliable menu of investment products.

This puts the onus on firms to balance the need for choice with processes that ensure that only the most appropriate solutions make it onto their shelves. Here are some challenges firms typically face when trying to pull off that balancing act and five ways they can best help advisors:

Providing ongoing due diligence: Every firm should perform due diligence on the front-end. The more difficult task is carrying out the necessary ongoing due diligence on existing products and investment strategies, which is a never-ending process.

Once a quarter, at a minimum, firms need to audit their platforms. When a mutual fund, for instance, undergoes a management change, often times it’s not front-page news, but it’s frequently the type of event that could lead to under performance.

Alternatively, what if a high-yield bond fund did poorly after an interest-rate reduction, just when logic would suggest that such a fund should do well? Firms owe it to their advisors to let them know when investments on the platform may begin to deviate from previous performance.

Recruiting-related demands: During the recruiting process, advisors often will make a specific product or manager a condition of their transition. Firms should fully evaluate whether such requests are worth hastily considering in this circumstance.

Often, though, it’s clear why something isn’t available. For example, a manager has limited history or too few assets under management.

Another common reason is a like option is already available that is performing just as well, or better. Typically, when firms assist advisors with understanding these factors, product-related ultimatums tend to disappear.

Firm soliciting informal RFPs: When a firm feels like it has a void on its platform, sometimes they will routinely solicit requests for proposals from wholesalers to fill a gap. However, rather than tipping their hand by letting third-parties know precisely what they are looking for, firms should for an explanation on what funds or managers they would invest in themselves.

With this approach, it’s likely they’ll introduce their best offerings versus saying what they think the firm wants to hear, helping to ensure a more durable outcome for advisors and their clients.

Cleverly designed sales pitches: When fund managers and wholesalers present marketing materials or fact sheets, there may be a tendency to minimize unflattering details. A manager says they beat the index.

Well, great, but how did everyone else do during the same period? Did they beat it, too, and maybe by a significant percentage? Their rolling average over three-years was off the charts. Why didn’t they disclose the calendar-year returns? There’s likely a reason why.

Firms should be able to sift through these types of distinctions by taking an analytical, dispassionate look at each offering to determine whether they live up to marketing promise, and then find a way to communicate their findings to advisors.

Clients asking advisors for access to emerging investment strategies: With impact investing sparking interest among clients, advisors are getting more and more inquiries about these strategies. Today, firms need to be aware of what products are available.

The same is true about investing in cannabis, Bitcoin or opportunity zones as laws and attitudes toward these products further soften around the world. The dilemma for firms is that many of these investment vehicles that provide access to these emerging areas remain relatively unproven. Still, firms owe it to themselves and their advisors to better understand what’s out there.

From an advisor’s perspective, perhaps nothing highlights the value of independence more than having a wide variety of product choices. Equipped with limited options, an advisor may feel, even if they are affiliated with an independent firm, that they are independent in name only.

For firms, this type of unquenchable thirst for flexibility can create challenges, though nothing that honest communication and a set of robust due diligence processes can’t solve.


Libet Anderson is Vice President and Managing Director of Advisory and Planning at ProEquities, Inc.


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