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Due to continuing market volatility, the tactical investment approach has been gaining increasing attention. Advisors should educate their clients on both tactical and strategic approaches. There is no universal solution for all clients and each situation is unique, but educating clients on different investment approaches is essential to help clients meet their long-term objectives. In this month’s article, we take a closer look at investment products and investment styles that advisors use in their clients’ portfolios.
Investment Management: Product
In today’s markets, advisors must spend more of their time staying abreast of the market and protecting clients against volatility. But even as RIA firms have been dealing with near-term market dislocations, other longer-term trends have been continuing to take shape, some of which are helping build and sustain advisors’ businesses.
For several years, advisors have been diversifying away from traditional mutual fund choices (see chart immediately below). In their place, we have seen steady growth in the use of ETFs, alternative-style mutual funds and alternative assets. In 2008, we also saw a spike in the use of money market funds, as advisors parked clients’ money in cash–a trend that nearly fully reversed in 2009.
What these trends suggest, especially in light of the shift toward tactical investing, is that advisors are searching for new solutions to address market volatility, risk and cost. ETFs and alternative-style mutual funds can offer lower investment costs compared to traditional products, such as equity and bond mutual funds and private hedge funds, respectively. They may also improve liquidity and flexibility to support a more opportunistic approach to investing.
Average Advisor Investment Product Usage
Investment Management: Style
Also in 2009, we saw a slight shift from strategic to tactical management of client portfolios, as advisors tried to cope with extreme market volatility and a very uncertain economic climate.
Investment Discipline Compared to the Previous Year
Strategic asset allocation,--long-term capital expectations are integrated with a clients’ goals and a target allocation is established. A key assumption is that an investment tends to remain relatively stable over long periods of time.
In Tactical asset allocation, portfolio adjustments are made based on short-term expectations for an asset class. 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 the short-term market environment. In short, tactical asset allocation keeps an eye to the long term but regularly adjusts asset allocation for changing market conditions. |
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Tactical and strategic advisors spend their time very differently. Investment advisors employing strategic asset allocation with passive funds are increasingly concerned about their ability to grow assets (long-term returns for that strategy are now unappealing to new clients) and they are frustrated that those same returns are not meeting their clients’ long-term objectives. 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.
Both tactical and strategic practices spend the same percentage of expenses on their staff and that staff looks very similar, with one exception: Tactical advisors who provide investment management in-house typically employ more portfolio managers/analysts than their strategic counterparts. Strategic advisors typically employ more client-services specialists. This is not surprising, given that money management is a larger focus for tactical advisors.
Investment Management: Stock Market Outlook
Where to go from here? Most forecasters are optimistic that the U.S. economy will grow at a moderate pace in 2011. Investment professionals agree with that and believe that 2011 will be better than 2010. The Advisor Confidence Index (ACI) showed a similar trend. The index was 116.13 in December, its highest mark in almost four years. The last time advisors were so optimistic was in February 2007. And many advisors, like Rob Siegmann of Cincinnati-based Financial Management Group, are optimistic looking forward. “The economic recovery should extend at least through the 2nd quarter of 2011 and late cycle sectors like energy are poised to do very well” said Siegmann.
Advisor Confidence Index
Of course, there is no one-size-fits-all solution for clients. We believe that no matter which investment philosophy you employ, you need to emphasize communication and educating your clients—make sure your clients have a solid understanding of your approach and philosophy and how it will help them reach their goals.
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