It’s Time Financial Advisors Become Matchmakers

It’s becoming clear that a “one-size fits all” approach will no longer work in the wealth and investment space, so is it time financial advisors became matchmakers?

Now, I’m not advocating for financial advisors to start offering services like arranging marriages or romantic “set-ups” between their clients. But, with increasing demand from investors for personalized investment solutions and a more bespoke service, financial advisors need to be well versed in matching investments to client needs. While at the same time, searching for investment managers that match the unique objectives of your clients has become more difficult. So what can be done?

One investment vehicle that helps meet the demand for personalized investments is separately managed accounts (SMA). SMAs are growing in popularity and poised for mainstream adoption as investors demand more transparency, control, and personalization.

SMAs provide investors with a professionally managed portfolio of individual securities, which allows the investor to directly own all securities in the account. This feature makes SMAs popular for those who may want to optimize tax efficiencies or customize the portfolio to include companies that exhibit superior ESG characteristics.

If you’re looking to jump on the SMA bandwagon, it is important to know what to look for when searching for the manager who best fits the unique investment objectives of your client. Below we outline some best practices when making a match between your client’s wishes and the picture-perfect investment strategy.

By leveraging the PSN manager account database through the investment management platform Zephyr, we can highlight the steps taken to locate managers who best match the needs of your clients.

Step 1 – Filtering Through the Sea of Candidates

Making sure potential candidates are available and not closed to new inquiries

The first step is to filter for managers who are open to new investments, have a retail investor wrap and follow the GIPS guidelines when calculating their performance. We recommend including these filters at the outset, as there is nothing worse than locating the “perfect” manger, only to find out they aren’t available to new investments, or the firm doesn’t offer that strategy in a retail wrap.

Step 2 – Making Sure the Options Align with The Client’s Beliefs & Objectives

Filtering managers based on qualitative factors is where the art of the search takes place. This step is where you locate managers that best align with your client’s unique values and beliefs, while also finding managers that might have expertise in a specific investment strategy.

Are you prepared to ask the right questions?

What qualitative questions should you ask prospective managers when conducting an investment manager search? Zephyr offers the ability to filter over 200 qualitative fields to gain a better understanding of the firm’s investment philosophy.

In this fact-finding stage, you should use qualitative questions and filters to determine a manager’s investment philosophy and “style”, helping you to identify early if the manager is committed to the style your client is looking for, or if they are always on the lookout for the hot new investment style and exhibiting a “style drift”.

To do this, you should look to determine how a firm locates and manages market inefficiencies. Here are some important considerations to gaining a better understanding of this:

• Where does the investment team find market inefficiencies?
• Does the view on market inefficiencies remain consistent throughout all market environments, including times when the investment style is out of favor?
• Or are they going to change their investment methodology to try and capitalize on the hot new investment style or sector?

This step is vital in learning more about the manager’s investment process, decision making, and area of expertise. Some other questions to consider when trying to gain a clear picture of the manager’s investment process and decision making could include:

• What is the investment philosophy?
• Does the investment team’s experience and investment expertise align with the client’s investment objectives, perhaps tax management, sustainable investing, charitable giving?
• What is the sell strategy?
• Fee disclosures – are the fees clear and transparent?

This is also the time to dig deep into the wider firm and investment team personnel. You will want to determine if the experience of the investment team, who will be the ones managing your client’s money, meets your, and ultimately your client’s, expectations. Consider asking:

• What is the tenure of the Portfolio Manager?
• Is it a team or individual managed strategy?
• Is there a succession plan, if so, what is it?
• What is the make-up of the total product team, what is the number of research analysts?
• Is the product team adequately staffed based on the amount of total AUM?

The last part of this qualitative exercise is to learn more about the firm that sponsors the SMA. Some of the firm’s personnel may not have an active role in the management of your client’s assets. It’s still very important to learn more about the firm’s culture, their commitment or willingness to be committed to SMAs, the level of communication and client service, and the ever-important regulatory filings. Some questions to consider investigating:

• Does the firm have any or currently under regulatory filings/issues?
• What is the turnover like among c-level management?
• How is the accessibility to the SMA provider?
• What level of experience and expertise does the SMA provider have?
• How committed is the firm to SMAs, or is it a mutual fund firm that just happens to offer SMAs as a side show?
• Does the SMA provider have the infrastructure to handle an influx of new assets and accounts?
  
  

Going through this qualitative due diligence process when seeking out a manager to match your client with can save a lot of heartache down the line, so resist the temptation to skip this step! When complete, you should understand the candidate’s morals, views and investment styles. Now it’s time to get analytical.

Step 3 – Taking the Next Step in The Matchmaking Journey

Once you have narrowed down your list of managers who are open to new investments, GIPS compliant, and with an investment philosophy and views that match your client’s wishes, you can start using quantitative analytics to hone the list further. Filtering through quantitative criteria is more science than art as the answers tend to be either “yes” or “no”.

There are numerous quantitative return and risk metrics to use when searching for managers who exhibit consistent, long-term returns with low risk. In-fact it may be daunting to sift through the different investment metrics that can be used to analyze an investment manager. A good place to start is to go back to understanding your client and what type of investor they are and want to be. It comes down to their investment objectives and risk tolerance. If your client has a high-risk tolerance and is an aggressive investor who is looking for a high rate of return you will want to focus on metrics like alpha, up-capture, Sharpe ratio and tracking error. In contrast, if your client is risk adverse and is focused on preserving capital, then you might focus on capital preservation statistics like pain index, pain ratio, downside deviation, maximum drawdown and down capture. Understanding what the type of investor your client is and wants to be is vital to a successful matchmaking process.

Here are some other questions to ask when conducting quantitative filters:

• Do the investment portfolio analytics align with the investment objectives? If the analytics don’t align with the investment objective, then why not?
• Is the strategy performance consistent with strategy mandates?
• Is the strategy style consistent or does the strategy’s performance drift from its style mandates?
• Can you see performance outliers that might be inconsistent with long term trends? Why did the strategy have a huge surge in performance one quarter compared to all other quarters? Or a big fall in performance compared to other similar time periods? What happened during that time?
• Are there any disclosures about performance that may raise red flags? (Read the fine print!)
• How does performance vary during different market/economic cycles? Did the strategy underperform/outperform during a period of crisis? How did it perform during a period of high interest rates compared to its peers?
• How does the strategy’s performance compare to its peers?

Your clients are demanding you provide them with personalized investments that align with their unique views, morals and investment objectives. Cookie-cutter, one-size fits all strategies no longer work. So, searching for and matching the appropriate managers to meet those unique objectives is more important than ever. It’s imperative that financial advisors know what characteristics to look for and how to look for them when searching for the perfect match.

What investment metrics do you already use when searching for the perfect manager? If you are looking for more information on different investment analytics, you can leverage our library of resources here. Happy match-making!