Advisor-Managed Portfolios Knocked Out by Home Office Performance – Cerulli

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett, Chairman and CEO of Berkshire Hathaway

Warren Buffett is probably the best known investor on the planet and the high priest of the buy-and-hold strategy. He told the Wall Street Journal that his favorite holding period for an investment is “forever.”

Financial advisors that manage their own portfolios apparently have not been following the Oracle of Omaha’s advice. According to a recent Cerulli report, over the past five years, portfolios managed directly by advisors have underperformed those managed by home offices by whopping 3.15%.  Cerulli attributed these results to home offices remaining invested throughout the financial crisis as well as better investment selection.

Continue reading

One Platform To Rule Them All: How Consolidation Transforms Wealth Management Systems

“Eventually, all things merge into one, and a river runs through it.”

— Norman Maclean, Author

In the past decade, we have seen consolidation across a wide swatch of the technology landscape. Cars have merged with computers to be able to drive themselves, televisions have merged with the Internet to offer more entertainment choices and cell phones merged with cameras, MP3 players, heart rate monitors and a myriad of other formerly separate devices.

This wave of merging technology is finally reaching the world of wealth management. The traditionally discrete products of mutual fund wrap (MFW), separately managed accounts (SMA), and rep as portfolio manager (RPM) are being brought together into unified managed accounts (UMA) as vendors and TAMP’s release new versions of their wealth management platforms that support an all-in-one mindset.

Continue reading

Active Management: Skill versus Luck

This is a summary of a panel discussion from the MMI 2013 Spring Convention held in NYC on April 22-24.

John Thompson, Partner, Head of Investment Solutions, Hewitt EnnisKnupp

Ed Foley, Director, Dimensional Fund Advisors
Brian Hansen, President & COO, Confluence Investment Management
Robert G. Smith, President & CIO, Sage Advisory Services

According to the Standard & Poor’s Indices Versus Active Funds (SPIVA) Scorecard:

The year 2012 marked the return of the double digit gains across all the domestic and global equity benchmark indices. The gains passive indices made did not, however, translate into active management, as most active managers in all categories except large-cap growth and real estate funds underperformed their respective benchmarks in 2012. Performance lagged behind the benchmark indices for 63.25% of large-cap funds, 80.45% of mid-cap funds and 66.5% of small cap funds.

Performance returns over the past five years clearly show that active management has had a tough time, Smith opined.  While many more fixed income managers beat their indices, equity managers tend to do better during rising markets.  Maybe equity managers could take after fixed income and do more sector rotation, he pondered.04-11-13-Failure-of-Active-Management-Equity

According to Hansen, there is a lot of “closet” benchmarking going on.  These managers are going to have a harder time trying to outperform over time.  Confluence believes that it’s better to do research and locate undervalued stocks for long-term payouts than to try and mirror the index.  They do have an ETF strategy group that exclusively uses passive benchmarks, he noted.

DFA maintains a blend between active and passive management, Foley explained.  Research shows that performance from active management is driven by a mixture of skill and luck.  The question is, how do you separate the skilled managers from the ones who were just lucky?  Also, can you structure portfolios around reliable premiums, he asked?

What are some long-term investment aspects that your firm is focusing on?

Sage offers three broad investment strategies; active fixed income, structured products, and tactical asset allocation using ETFs, Smith reported.  He believes that the hot button strategies going forward will most likely be global tactical active allocation, multi-asset income, and fixed income strategies that take advantage of ETFs on an opportunistic basis.  They avoid buy and hold strategies, which failed in 2008 when the financial crisis effectively changed “core plus into core minus”, he joked.

DFA started in 1981 and have always had close ties with the University of Chicago, Foley explained.  Their philosophy on building portfolios is encompassed in three principles; 1) Markets reflect all information available to buyers and sellers, 2) portfolio structure determines performance and provides significant contribution to how performance is generated; and 3) diversification, he said. Continue reading

Why Haven’t Advisors Embraced Unified Managed Accounts?

This is an overview of a session from the MMI 2012 Tech & Ops Conference held in Jersey City, NJ.


  • Jay Link, Managing Director, Managed Solutions Group, Merrill Lynch


  • Andrew Clipper, Managing Director, Head of Wealth Management Services, NA, Citi
  • John Capelli, Managing Director, COO, Managed Account Advisors, Merrill Lynch
  • Rob Klapprodt, President and Co-Founder, Vestmark

Are UMA/UMH and Rep as PM essentially the same thing?

While there are similarities between the Merrill UMA and Rep as PM programs as far as the end investor is concerned there are important differences, Capelli emphasized. UMA’s can include investment management delivered strategies, for example. Also, while Rep as PM can use mutual funds and ETFs to provide exposure to lower correlation asset classes, such as emerging markets, a UMA can deliver them at a lower cost using individual securities, he said.

If the goal is to create a portfolio across all of an investor’s assets, those assets are usually spread out across numerous legal entities and accounts, Clipper observed. The UMA/UMH structure is the best delivery mechanism for a holistic approach. On the OpenWealth platform, they separate out portfolio administration (i.e. rebalancing, asset location, cash management) from the intellectual property (i.e. the models). The portfolio administration is all handled in a central location, while the intellectual property can be added anywhere along the value chain, he said.

Continue reading

The Wizards of ETFs – Behind the Curtain (2/2)

This is a review of a session from the Money Management Institute’s 2012 Fall Solution Conference.  This is part two of a two-part series.  You can read part one here.


  • Benjamin T. Fulton, Managing Director of Global ETFs, Invesco Powershares Capital Management, LLC


  • Sam Turner, Director of Large Cap Portfolio Management at Riverfront Investment Group
  • Jill Iacono Mavro, Managing Director, Head of National Accounts, State Street Global Advisors – $337 billion in ETF assets globally, 94% in US, SPY launched in 1993
  • Dodd Kittsley, Senior Product Manager & Head of ETP Research, iShares

How much weight should advisors put on liquidity when evaluating an ETF?

There are two levels of liquidity: primary and secondary markets, Mavro said. On the primary market, an ETF is as liquid as the underlying index that it tracks. It depends on how easy is it for authorized market participants to trade the basket of securities that represent the index. On the secondary market, liquidity is defined by how often the ETF is traded. The more it is traded, the thinner the spread between the bid and ask prices. Advisors should look at both levels together, not just one or the other.

Turner disagreed and stated that primary market liquidity and fees are the two worst reasons to select ETFs.  Riverfront focuses primarily on exposure and have never had an issue getting out of an ETF due to lack of primary market liquidity, he said.

Secondary market liquidity can become an issue when investing ETFs according to Michael Jones, also from Riverfront Investments, who was in the audience.  He provided an example where Riverfront was the seed investor for an international ETF that was currency-hedged (The ETF happened to be DBX MSCI EAFE Hedged Equity Fund, symbol: DBEF). Primary market liquidity wasn’t a problem for them since they were working directly with the authorized participant and had great execution.  However the use of the currency hedge became more and more expensive to the point where they had to pull their investment due to the high marginal trading costs of bringing on each additional client, he said.

Should You Avoid ETFs with Low AUM?
An article in Barrons makes the case that low AUM is not a good liquidity indicator for ETFs:
“…asset levels aren’t always the best proxy for liquidity. Unlike a stock, an ETF can still have strong liquidity even if its trading volume is low or its assets are tiny. That’s because the underlying stocks’ or bonds’ liquidity is usually the best way to measure an ETF’s real ease of trading. Barron’s asked market-making firm Knight Capital to rate the liquidity of 30 small ETFs whose 2012 returns are about double those of the S&P 500 as of early November. If you judge ETF tradability by the way its components trade, as Knight does, you’ll find lots of low-asset ETFs with more-than-expected liquidity. “I wouldn’t shy away from ETFs that have low volume or low assets. You just have to be smart about how you trade it,” says Eric Lichtenstein, managing director of Knight’s ETF trading desk.”

Continue reading