From the Corner Office is the leading blog for emerging independent financial advisors (AUM of $20-200MM) designed to address the common strategic and managerial issues associated with building a profitable practice. The blog is authored by the team at Pinnacle Advisory Group, an independent financial advisory firm serving more than 650 families with assets of nearly $1 billion and a four-time winner of the coveted Moss Adams Best Managed Practice award. The blog will typically be posted on the 15th and last day of the month.
We are more than ten years into the secular bear market and this summer’s market swoon reminds all of us that the future remains uncertain. Indeed, market observers note that we may be on the precipice of a third major market decline. Advisors have taken notice. Our conversations this summer offer anecdotal evidence that advisors are taking a more proactive approach to risk management. Some are raising cash. Others are experimenting with more tactical approaches. Indeed, one of the hot topics at FPA Experience in San Diego a few weeks ago was Tactical Asset Allocation. Why? Because advisors have experienced the disappointing results that Strategic Asset Allocation provided twice already and are less than enthusiastic about telling their clients to stay the course and suffer yet another loss. After all, many of those clients wanted to sell last time and were talked out of it … and here we are again.
By talking with advisors about the risk-managed investment solutions we are offering at Pinnacle Advisor Solutions, we have also learned that many of the advisors experimenting with tactical asset allocation are realizing that doing it themselves is a considerably more difficult undertaking than Strategic Asset Allocation. In fact, even those who have been at it since the financial crisis in 2008 are now suggesting to us that they have been less effective than they had hoped and are looking for a better solution.
What are they encountering that suggests emerging advisors cannot risk-manage assets themselves? The first lesson is that the learning curve is long; the second lesson is that the effort is time consuming; and the third lesson is that it is cost prohibitive.
- The learning curve is long. Most advisors were trained in Strategic Asset Allocation: create a portfolio of diverse asset classes and let time deliver the required returns. A more proactive, risk-managed solution requires that an advisor make regular decisions about risk and return. This is a different skill set and one that requires experience. Pinnacle has been at this for nearly a decade and now boasts an enviable 9-year GIPS compliant track record. But that did not happen over-night. The team was built over time and each new member requires about two years to be fully effective within the system.
- The effort is time-consuming. Today’s markets are moving fast and volatility is considerable. To advance a more proactive risk-management strategy requires decisions in real-time. That means one must pay attention in real time. That is a tall order of emerging advisors that are already time constrained with their responsibilities to do financial planning, client meetings, business development, back office operations and compliance. Pinnacle Advisory Group recognized this fact early and chose to remove investment responsibilities from its 8 wealth management teams and centralize investment operations with a dedicated five person investment team tasked only with delivering a risk-managed investment solution.
- Risk-managed tactical asset allocation is cost prohibitive for emerging advisors. Per our observations above, a dedicated team with the necessary training and research resources required to be effective is expensive … in fact out of reach for most emerging advisors. Indeed, Pinnacle Advisor Solutions spends more than $1 million per annum to support its investment team which is more than most advisors with AUM of up to $100MM generate in annual revenues. Furthermore, we estimate the firm has spent nearly $10MM cumulatively developing this in-house capability.
So if the environment is calling for a more risk-managed solution … and clients are demanding greater asset protection … and emerging advisors are not in a position to risk-manage assets themselves … then what are they to do? There are two basic choices: (a) join a larger firm with greater resources who has developed a risk-managed solution or (b) outsource to a firm with the necessary scale to provide an effective risk-managed solution. Independent advisors are independent for a reason: they are entrepreneurial and want to possess full control over the client experience. So the first option will not be appealing for many. Outsourcing is the solution we believe independent emerging advisors will prefer. They can maintain their independence while still benefiting from the economies of scale of a larger firm dedicated to risk-managing assets. The good news is that there are a number of reputable TAMPs to choose from. The bad news - based on our conversations with many of you - is that TAMPs don’t measure up. That is a topic we will address in our next blog post on October 15th. It also reflects the need that Pinnacle Advisor Solutions was created to fulfill. Stay tuned for more.