Recently, we had a conversation with an advisor who has been transitioning her direct mutual fund business to fee-based accounts with Bellatore. Her feedback on how quickly and impressively her business and her life changed compelled us to write this article.
When we first met this Texas-based advisor a little over a year ago, she had built a respectable business with very strong client relationships. She was managing over $30 million in direct mutual fund investments in a traditional commission-based relationship.
However, her success was beginning to cause her to feel overwhelmed, especially since she was managing everything by herself. It got to the point where she was questioning whether or not to take on new business. She was worried about staying on top of her investment management duties, and, being in a small office, she felt alone.
We helped her transform her business through a transition to a fee-based model and she immediately felt some relief. While she definitely benefited from outsourcing some of her businesses operational and administrative duties to Bellatore, she was most impressed with the enhanced investment benefits she could offer her clients.
We outline her perspective on five investment benefits that her clients have been receiving from her new approach:
1. Investment Coordination
As her business grew, she found it harder to implement her best investment ideas on a regular basis with a wide range of clients. It got to a point where she stopped taking on new clients since the burden of monitoring investments, calling the clients for approval and then implementing the trades became too time consuming. Does this sound familiar?
We showed her how a fee-based approach using a managed money program could bring a great deal of consistency and coordination to her business. By using a model-based approach where she assigned multiple clients to a single investment allocation, she would be able to implement her best ideas at the same time and for every client that was part of the program.
She didn’t have to worry about not being able to reach a client that was on vacation and she didn’t have to fret about neglecting some of the clients she didn’t speak with that often. She said it was like taking her business from managing 500 individual models to 5 best idea models.
2. Better Risk Management and Goal Focus
This advisor wanted a better idea of how her clients’ portfolios were positioned. She used tools to calculate and track some statistics on her commission account holdings, but doing that analysis for all of her clients (with holdings in multiple places) took a massive amount of time. Like mentioned above, placing clients into similar models helped her know how her clients were invested, so portfolio analysis became more focused, automated and meaningful.
Additionally, she could now more easily target certain levels of risk and make sure that the portfolios were aligned for the client’s desired outcomes. Using the model-based approach, she can now determine what risk and goal measures are important to her and align the portfolio to achieve those goals. For this advisor, she focused on standard deviation, beta, yield and the underlying holdings in each portfolio. If she wants to increase risk or decrease risk at any time, she can easily do that. If she wants to know the beta of a client portfolio, she can quickly calculate it on a portfolio model and know that it applies to all clients invested in that model.
By partnering with Bellatore, this advisor was able to define the relevant statistics that mattered most to her, put them into a written policy document and help calculate the statistics. Other firms can do this as well, but when you are researching these firms, make sure you ask them how they manage risk, if they have set parameters for risk and return and if you have the ability to customize any of them (assuming that is important to you).
3. More Investment Options
When it came to investment choices in her commission-based structure, she had limited time to research a wide range of fund companies, and she didn’t want to consume her clients’ time by having them sign a stack of applications from numerous mutual fund companies. Like many other commission-based advisors faced with this dilemma, this prompted her to limit the number of fund companies she used. She knew there may have been better managers in some of the strategies, but finding those managers and monitoring those managers on an ongoing basis was too daunting of a task.
Going fee-based made it easier to access a wider range of investment options and helped her find better managers for certain asset classes. She started by having Bellatore analyze the current funds she used. She provided us a list of the funds she was currently using, and we helped her compare them to alternative fund managers and ETFs. The process was fairly easy and rewarding for her. She confirmed that some of her choices were very good and others could be improved upon.
She also used a third-party custodian to implement her fee-based account structure. This gave her immediate access to more investment options and didn’t require her or her clients to fill out all the necessary paperwork associated with opening accounts at even more individual mutual fund companies.
4. Broader Diversification
In addition to comparing how different managers performed against the managers she was already using, this advisor wanted to see if there were additional asset classes or strategies that could add value to her client’s portfolios. This advisor was already using some alternative strategies which had provided favorable results to her clients, but, for a variety of reasons, she wasn’t using them with all of her clients.
The fee-based model framework allowed her to easily deploy these alternative asset classes to more of her clients, thus broadening the diversification in her clients’ portfolios. Additionally, we introduced a number of other stock and bond asset classes that were not currently being used because her preferred fund company either didn’t offer them or didn’t have a good track record with those strategies.
In the end, this advisor was able to broaden diversification at three levels: the asset class, sub-class and manager level. Every change was tested and measured to make sure that value was being added and the client stood to benefit from the change.
5. Ongoing Monitoring and Rebalancing
In her commission-based structure, this advisor spent a great deal of time handling the ongoing maintenance of client accounts. In addition to the time required to research investments and develop an appropriate investment strategy, this maintenance was very time consuming. Her overwhelming workload would increase further whenever one of her clients made a deposit, needed a withdrawal from their accounts or if she wanted to change an investment.
Partnering with a turkey asset manager or third party money manager, in her case Bellatore, allowed her to hand off the implementation of these ongoing maintenance tasks. Additionally, many of them became automated so the advisor worried less about the operational implementation of her recommendations, again, allowing her to focus more on helping her clients with their goals and planning needs.
Additionally, the advisor can now easily reposition the portfolio when needed and rebalance the accounts to correct for the natural market movements (i.e., drift) that occur over time. Rebalancing is a powerful portfolio management tool. Some studies estimate that dynamic rebalancing may add up 0.5% to an investor’s annual return since it helps you incrementally buy low and sell high on a consistent basis.
A Robust Investment Offering
Helping manage clients’ investments was always a strength for this advisor’s business. Converting to a fee-based, managed portfolio structure has allowed her to leverage her investment strength and, for the first time in awhile, take on new business.
Every advisor and advisory business is different. Finding a flexible partner that allows you to focus more on what you do best can yield better and more enjoyable results for you and your clients.