Movers and Shakers:
A Comparison of Tactical and Strategic Advisory Practices

The investment advisor world can be divided into many subsets. There are wealth managers and investment advisors. Big firms vs. smaller firms. Older firms vs. newer firms. Sole practitioners vs. multi-principal shops. But one of the biggest differentiators is in the area of investment management: specifically, active (or tactical) vs. strategic firms.

In recent years, more and more advisors are becoming tactical in order to find opportunity and hedge risk in an increasingly challenging market. In fact, the percentage of advisors who employ tactical investment techniques doubled in the two-year period from 2003 to 2005, jumping from 17% to 38% of the total advisor population, according to our research. This increase suggests that advisors are taking a more proactive approach to managing portfolios. Currently, the investment landscape is pretty evenly split—about 45% of advisors declare themselves “strategic,” while nearly 40% of advisors say that they are “tactical asset allocators.” (The remaining 15% of the population is comprised of those labeling themselves as “market timers,” “core and satellite investors” or “other.”) It’s important to note that most “tactical” advisors still create long-term strategic asset allocation targets for clients’ portfolios, but they also make periodic adjustments for the asset mix based on short-term market adjustments.

Drilling deeper, we discovered that advisors with different investment styles build their businesses differently as well, and their divergent business models can result in some distinct differences in many other areas of their practices.  

Time well spent
Tactical (active) and strategic advisors spend their time very differently. Tactical advisors spend the majority of their time on portfolio management (35% vs. 20%) while more strategic advisors spend more time on marketing (15%) and business administration (20%) than their counterparts. This distinction is not surprising given that a more active investment style requires more attention to investments and their day to day movements.  

Chart 1: Time Spent by Tactical and Strategic Investment Advisors



Money well spent
Tactical advisors tend to pay themselves first. In fact, their biggest expense, by far, is their own compensation (40% of expenses vs. 20% for strategic advisors). Tactical advisors, not surprisingly given their active investment style, also spend more on research than strategic advisors. Both compensate staff equally—20% of their expenses goes to their staff. On the contrary, strategic advisors spend much more than their tactical counterparts on rent, office expenses, travel and marketing/advertising.  


Chart 2: Expenses Allocations: Strategic vs. Tactical Advisors

Threatening circumstances
Strategic and tactical advisors have a slightly different view on what they perceive as threats to their businesses. Both consider the ability to work in and on their business simultaneously as a top threat—pointing to the challenges of being a strategic visionary leader, as well as a hands-on business owner. They also rank government overregulation as a top concern. But that’s where the similarities end. Strategic advisors rank “difficulty in managing client expectations” as their top challenge, followed by bear market impacts. In contrast, tactical advisors say their top challenge is “importance of size to compete,” followed by working on and in their business simultaneously and lastly, government overregulation.   

Trades per client
Since tactical advisors are, of course, more active, it’s no surprise that they trade nearly twice as frequently as strategic advisors. In 2005, tactical advisors made, on average, 12 trades per client per year compared to strategic advisors who made just seven trades per year per client.

Staffing
Both tactical and strategic practices spend the same percentage of their expenses on their staff and that staff looks very similar, with one exception: tactical advisors typically employ more portfolio managers/analysts than their strategic cousins. This is not surprising, given that money management is a larger focus for tactical advisors.

Chart 3: Average RIA Firm's Employee Breakdown (Tactical vs Strategic)

All things being equal
While there are some distinct differences between tactical and strategic advisors, there are also many similarities. Average account size, minimum account size and AUM are all fairly similar across both groups. Profitability is about equal and no-load funds are the top investment choice for both camps.

While the advisor universe shares many similarities, attempting to lump all advisors together and draw conclusions may not reveal the entire picture. No matter how you slice and dice the advisor landscape, each subset has distinct differences that enable them to be uniquely successful in their niche. It’s important to recognize your own niche and understand that even if you differ from the average, your differences may give you a strong advantage.