Does Every Client Get Put Into One Of A Few Investment Allocations?

with No Comments


I was asked recently if we put our clients into one of only several different investment buckets.

The short answer is, “No.”

But the longer answer is that even if an investment advisor put their clients into one of several different asset allocations, they could still be earning their fee several times over. In fact they might earn their fee simply by investing in lower cost index funds!

Comprehensive Wealth Management is a near infinite task. The determination of what changes provides the greatest benefit over time is an important consideration in prioritizing the possible services to offer clients.

Even our 2014 Gone-Fishing  Portfolio Calculator has over a hundred different asset allocations made from just 13 different investment choices. Were an investor (or even an investment manager) to use this calculator for their client’s asset allocations, they could still bring considerable value to their client’s finances.

By keeping investments simple, an advisor could free up more time to do retirement planning, rebalance regularly, do Roth conversions, put the right investments in the right investment vehicles, work with clients on saving appropriately, compute safe withdrawal rates, optimize their Social Security, do tax planning, review their estate plan , optimize their mortgage or a host of other financial planning services which bring real value to a household’s finances.

Even if an advisor keeps their investment management simple, they could still bring great value to their clients.

We, however, are set up to work with significant complexity.

First, we set an individual asset allocation for each of our clients for the six different asset classes we use. This top level asset allocation will determine much of the investment risk-return that you will experience. We recommend this top level asset allocation based on a client’s age, ability to take risk, and withdrawal rates.

I did a search in our database, and with over 200 clients I found 6 pairs of clients that had the exact same top level asset allocation.

Under these top six asset classes we have a few dozen sub-categories which represent sectors or styles or regions of the overall asset class. The investment committee determines our target allocation of the top level asset class which should be allocated to each underlying sector. Changing the top level of six asset categories requires notifying the client as that will change their risk-return experience. Changing the underlying sector allocation is a strategic decision which the investment committee makes.

So for example, a client might have a 30% allocation to foreign stocks as part of their top level asset allocation. The investment committee might have decided to allocate 8% of foreign stocks to Switzerland. That would results in a target of 2.4% of their entire portfolio being invested in Switzerland.

Once we have a percentage allocation to Switzerland, we do have a current preferred investment choice for Switzerland.

Investing is easy if a client comes to you entirely in cash. Our preference is to use iShares Switzerland Capped ETF (EWL). Last year EWL had a 26.47% return. And its ten year annualized return ending 12/31/2013 has been 10.00%. But most of our clients don’t come to us entirely in cash. They come to us with a host of different investments, many highly appreciated in taxable accounts, which we need to analyze to see if it is worth selling them and purchasing better investments.

So for example, if a client holds stock in Nestle, Roche, or Novartis, these are all Swiss companies and the top three holdings in EWL. Our analysis puts these three individual stocks in the same bucket as EWL. And these investments count toward a client’s optimum asset allocation target for Switzerland.

With every client holding either put into a sector category or often split between several categories, we can make strategic adjustments between categories and the next time we review we immediately see exactly what we should buy or sell as a result.

Even clients for whom we made the purchases might be invested in different funds. For example, we used to use iShares Emerging Market ETF (EEM) for our emerging market allocation. Now we prefer the Vanguard Emerging Market ETF (VWO). Both of them are good funds. But if we purchased EEM in a taxable account for a clienr, that position is now highly appreciated and would be subject to capital gains tax were we to sell it. It is not worth paying the capital gains just to switch to an ever-so-slightly preferable choice of investments. Since the hurdle rate on realizing capital gains can be high, we have clients who are invested in both of these funds. In their portfolio asset allocation analysis both of these funds count in the same emerging market sector.

So while every client has a tailored top level asset allocation and may have very different holdings for each of the sectors, they are all governed by the same investment philosophy and the same list of investments we would purchase if someone came to us right now in cash.

Both the author and the clients we manage often invest in the investments mentioned in these articles.

Photo by lanchongzi used here under Flickr Creative Commons.

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.