Asset allocation strategies drive advisor business

By Mark Noble | November 11, 2009 | Last updated on November 11, 2009
5 min read

Those who manage more than $50 million in assets are overwhelmingly choosing balanced mutual fund mandates for their clients, according to an exclusive survey of 330 Canadian financial advisors conducted for Advisor’s Edge Report by the research group at Rogers Business and Professional Publishing.

Almost two-thirds of the high-performing advisors surveyed (64%) were advising clients to put most of their money into balanced mandates during the downturn versus 55% of all Canadian advisors. Almost the same amount of advisors, 63%, said they were recommending balanced mandates more than they were in the past.

Balanced mandates also accounted for an average of 46% of current sales for large-book advisors. Although, unlike their counterparts with smaller books of business, large-book advisors also had a much higher proportion of money market sales, which accounted for 17% of sales versus only about 11% of sales for advisors in general.

Chet Brothers, owner of Regina-based Brothers and Company, notes that balanced mandates fit in nicely with the focus he feels more successful advisors put on planning for their clients versus selling product.

“Our investment objective for most of our folks is to provide increasing income at retirement. For that reason, we’re using a lot of balanced funds and dividend funds with a heavy emphasis on funds that pay out dividends,” he says. “Dividends grow over time and that creates the income stream for our clients. I think the advisors who have built the bigger books of business realize their job is not to pick a best fund, speculate and then wheel and deal in the mutual fund business. It’s to set a plan and use a disciplined investment approach to deliver on that plan.”

Brothers also says that the benchmark he uses “is not what the market does, it’s what the plan has to do to allow the client to achieve their goals.”

Paul Bourbonniere of the Polson/Bourbonniere Financial Planning Group Inc., affiliated with Dundee Securities Corporation, says individual investment selection is low on the list of what he does when compared to creating the right asset mix for clients. “Manager selection is always at the bottom of what we do,” Bourbonniere says. “Manager-of-the-month club is not the game we want to play. We’re more concerned with tax effective income strategies, controlling volatility within a client’s portfolio and estate planning. We will use a third-party portfolio process, where they are doing the manager selection for us.”

Cost of execution is another area where high-performing advisors seem to differentiate themselves from the rest of the advisor industry. When asked what mutual fund companies should be doing differently in their fund offering, they were far more fee conscious than the industry as a whole.

More than a quarter of top advisors (27%) indicated that mutual fund companies still need to lower their fees and provide lower fee structures for larger client accounts.

This is probably logical since high-performing advisors have the economy of scale to make lower fees worthwhile. The large account clients they serve also seem to demand the lower fees.

Brothers says there is price elasticity now for higher-net accounts so mutual funds can compete with the price points offered by some independent investment counsellors.

“Whether it’s called O-class or I-class, if a fund firm offers some format where if you have significant amounts of money to invest you get a break on the fees, that’s important to us,” he says.

A penchant for lower fees does not equate to using exchange-traded funds. ETF usage appears to remain low amongst all advisors, with larger book advisors appearing to move a larger proportion of their assets to that part of the business.

Only 7.8% of advisors surveyed gave a strong rating to the statement, “I am spending more time looking at lower cost investment products such as ETFs.” For advisors with books of business in excess of $50 million, that affinity was much stronger, at 17.8%. Even still, the vast majority of top advisors seem to use managed investment funds as their go-to product.

Bourbonniere says he’s using a combination of the two, opting to use ETFs to give clients broad-based coverage of U.S. equities, a market in his opinion that is too efficient for mutual funds to consistently outperform.

“We use mutual funds and ETFs. We are big fans of managed money, we’re not fans of individual stock picking for our clients. We do use some passive mutual fund products such as Dimensional Fund Advisors and some index funds. Overall, the mutual fund structure is not a problem, we still it being effective,” he says. “I tend to be agnostic toward active management. Particularly in a big market like the U.S., it’s difficult to beat that.”

Robert Abboud, a CFP with Wealth Strategies in Ottawa, says using ETFs can make an advisor’s job more difficult. Much of the asset allocation and rebalancing will be left up to the advisor. That can be a time consuming and difficult job in combination with the tax, insurance and estate planning that many advisors engage in.

“We’ve looked at ETFs and studied some of them, and I’m still doing due diligence in examining them,” he says. “I still think there’s immense value to be added from a good mutual fund, like a Peter Cundill. No matter how you jam an ETF in there, I don’t think you can beat a guy who’s been around the world and has seen all the market conditions. What concerns me about ETFs is they are almost on auto-pilot [DASH] there is nobody there to pull the trigger.”

On the converse, ETFs seem to be the go-to tool for fee-only advisors, who stress asset-allocation as a key differentiator of the services.

“The way that we operate, we are asset-class investors where we do extensive research to create portfolios and then we find cost efficient strategies,” says Brinsley Saliken, a registered financial planner with Vancouver-based Macdonald, Shymko & Company, “I don’t use balance funds. I would be giving the asset allocation to another manager and that is obviously a big part of the process we offer at our firm.”

Across the board, the most important investment-selection criterion for advisors is performance, particularly long-term performance. Our survey respondents noted that their clients are in investing for the long haul, so advisors want their money managed by established people with a long track record of consistent success.

Nearly a third of high-performing advisors (30%) picked performance as the most important selection criteria that they look for in a mutual fund. A further 20% chose manager consistency, whereas only 6% of advisors with fewer than $10 million in assets used this measure.

These responses seem to correspond with the process Bourbonniere undertakes with his investment selection.

“We’ve never had anybody out on the aggressive side of investing. A 60 (equities)/ 40 (fixed income) asset mix and 50/50 portfolios account for 80% of our client base,” Bourbonniere says. “We would look to (longer term) performance relative to a benchmark net of fees.”

He adds, “It’s a combination of risk/reward on returns for the mandates we select. The managers have to have volatility under control. I don’t want them to beat the index at the expense of volatility.”

Mark Noble