I want to challenge you to do something that might feel uncomfortable. I want you to think of your entire book of business as one giant portfolio. If you want to simplify your business, improve long-term performance and become more disciplined, you will need to live by the phrase “Less is more.”
You probably have many examples of pairs or groups of clients who know each other. Consider the possibility of two hypothetical clients speaking to each other about their investments. They both rely on you – let’s call you Barb – for advice.
One client remarks: “Thanks so much for referring me to Barb. We had a terrific 2013 – up by 18%.”
The other responds: “Really? I don’t know what she invested you in but we were up by only 10% last year.”
This conversation reflects an inconsistent client experience, which is a common situation among clients, even those who have similar asset mixes. This inconsistency exists in your book if you use a wide variety of products for each type of exposure to stocks and bonds – e.g., using several funds just to cover the Canadian stock market.
The key to shifting this inconsistent client experience to a more uniform one is to incorporate ‘customized consistency.’ The idea is to standardize the building blocks used for your clients’ portfolios while customizing how you blend them to help your clients achieve their objectives.
This isn’t a cookie-cutter approach; it is a higher-conviction method. Suppose you are convinced that you’ve found what you consider to be one of the best global equities portfolio managers. In that case, each of your clients who need global equities deserves to have this top-tier manager in their portfolios. This would apply to every type of mandate (i.e., the building blocks) used in your clients’ portfolios. That’s the consistency part.
Just because all of your clients have the same portfolio components doesn’t mean that you can’t build customized portfolios. For corporate accounts or other taxable clients, maybe you use a corporate-class version of your preferred funds and mandates. Every client will have his or her own asset mix strategy based on his or her needs. And asset- allocation advice will always depend on each client’s marginal tax rate, account structure and other circumstances. In other words, there is a lot of room to custom-build your clients’ portfolios even when using the same portfolio components for everybody.
If you use mutual funds or exchange-traded funds (ETFs), this means using no more than four or five funds to cover all of your clients’ equities exposure. Add two or three funds to cover bonds. If you select stocks or bonds yourself, this can be integrated nicely with funds or ETFs to round out client portfolios to effect the required diversification and exposure.
Really tightening up the list of products you use has three associated benefits. First, the solutions you present to clients will be your ‘A team’ – each portfolio component will be a high-conviction idea or product. Second, by focusing assets in fewer products, you’ll have greater access to the portfolio managers pulling the trigger for your clients. And, finally, more focused portfolios will increase the likelihood of superior performance, which will be more widespread across your book rather than in a few clusters.
Dan Hallett, CFA, CFP, is vice president and principal with Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.
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