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Financial advisors wear many hats – guiding clients through important financial planning decisions, designing and managing portfolios, tracking market trends, and more. But as markets evolve and investment strategies become more sophisticated, the demands have become too multitudinous for any one person to handle alone.
While some advisors may attempt to balance both financial planning and investment management, the reality is that these are two very distinct, time-consuming processes best tackled by a team of financial specialists. In today’s hyper-competitive environment, delivering an institutional-caliber portfolio isn’t just table stakes – it’s a fiduciary mandate that exceeds the scope of an individual advisor.
Here is a checklist to help advisors evaluate whether their current approaches align with institutional best practices.
1. Investment committee governance and independence
A carefully assembled and well-governed investment committee unites a depth and breadth of expertise and real-world experience unmatched by any single advisor – while minimizing bias and enhancing risk oversight. To maintain true independence, investment teams and committees should function independently, free from the influence of the firm’s executive management and shareholders. Ideally, the committee should be structured to include only the chief investment officer from the executive leadership team. This approach helps to ensure that decisions are rooted in financial science and clients’ best interests rather than demands from the CEO, board or shareholders.
2. Close collaboration with leading global asset managers and academics
Achieving optimal investment outcomes requires more than just in-house expertise. By maintaining strong partnerships with top-tier asset management partners, advisors can access institutional-grade research and investment opportunities that reflect their clients’ evolving needs.
These relationships may allow advisors to construct well-rounded, resilient portfolios that align with changing market conditions and client objectives. Fiduciaries’ investing strategies should always be evidence-based and capable of withstanding peer review and academic-level scrutiny.
3. A centralized approach to allocating investments
Scale can be a key advantage, enabling firms that centralize purchasing power at an institutional level to secure better pricing on investment products, lowering costs for clients and gaining direct access to institutional platforms.
A centralized approach that bundles purchasing power may also help secure exclusive access to in-demand, capacity-constrained managers and strategies. This is especially true in private markets. This can create efficiencies that might otherwise be out of reach for any individual or single advisor.
4. Deep, sophisticated diversification across both public and private markets
Financial science has long maintained that broad portfolio diversification – both across and within major asset classes – is the best approach to help maximize return potential and for a given level of risk. But the fact is, over the past quarter century, public markets have shrunk relative to private markets. This means that achieving broad diversification requires the ability to effectively allocate portfolios to both public and private markets. However, gaining access to the latter often requires deep institutional relationships.
5. Clearly defined, quantifiable mandates
If you don’t measure it, you can’t manage it. This concept is critical to driving the efficiency and efficacy of firms’ investment processes. It’s about understanding what decisions impacted past risk and returns – and which ones didn’t.
Wealth managers need to evaluate a variety of important metrics to ensure that investment mandates are clearly defined and quantifiable. Popular metrics may include tracking error, various betas, Sharpe ratios and various forms of multiple regression.
6. A well-defined investment process that uses alpha-beta separation throughout the manager selection and monitoring process
Alpha-beta separation is a technique used by sophisticated institutional investors to better understand the sources of a manager’s outperformance. Alpha is the unexplained variance in a portfolio’s return, while beta is that part of the portfolio’s return that’s attributable to cheap, easily accessible market exposure. By applying rigorous alpha-beta separation, advisors can potentially enhance portfolio performance while minimizing unnecessary expenses for clients.
7. A high caliber technology stack to deliver customization at scale
The technology that a firm deploys matters and ought to be a fundamental consideration. A particular investment strategy can be clearly defined on paper, but its successful execution depends on having integrated tools that can analyze data and share insights effectively across multiple platforms. Without a top-notch tech stack, the implementation of any strategy is likely to fall short of its intended goal.
8. Real-time, optimized tax management for all taxable accounts
The only returns that matter are the ones we get to keep. Any broadly diversified portfolio is bound to have components that are performing well, and others that are lagging the benchmark. By utilizing strategies such as tax-loss harvesting, investors can use losses to offset their gains, a strategy that has been shown to boost after-tax returns by more than one percentage point on an annual basis.
9. Asset location optimization across portfolios
When it comes to minimizing or avoiding taxes, advisors should determine whether an investor’s assets are held in a taxable or tax-advantaged account, like an individual retirement account (IRA) or 401(k). The general strategy is to favor tax-advantaged accounts for assets that would otherwise incur high taxes – such as corporate bonds that have fully taxable interest payments – while placing assets in taxable accounts that tend to have a lower tax liability.
10. A full suite of sophisticated solutions to unwind low-basis positions
Long-term investors, and those who have built their wealth through a position in a single company, are likely to have concentrated positions that they’re reluctant to sell. Though that reluctance may reflect an emotional attachment to the company that built their wealth, it’s often driven by a desire to avoid the capital gains taxes that would be incurred from selling their position.
However, there are numerous strategies that investors can use to diversify highly concentrated positions without the pain of a huge tax hit. A portfolio manager can lean into partnerships with institutional experts to explore their options, including long-short or derivative-based strategies, direct indexing or use of exchange funds to maintain diversification.
It takes a village
Best practices in portfolio management are constantly evolving, and this list of strategies will change shape over time. But an institutional-level team can take on many of these critical responsibilities, allowing advisors to focus on delivering personalized financial planning and strengthening client relationships.
By leveraging a team-based approach, advisors can help ensure portfolios are professionally managed, cost-efficient, tax-optimized and strategically diversified – all while maintaining a level of sophistication that is difficult for any one individual to replicate. Advisors who embrace this model will likely be better positioned to deliver stronger outcomes and, ultimately, to make capital markets work harder for their clients.
Don Calcagni, chief investment officer at Mercer Advisors, a national registered investment advisor (RIA).
The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. All investment strategies have the potential for profit or loss. Diversification does not ensure a profit or protect against a loss. Investing in private funds is speculative and will entail substantial risks. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
