Constructing a portfolio isn't a walk in the park—it's more like assembling a puzzle with a bunch of moving parts. You've got to juggle risk, returns, and individual investor goals while keeping an eye on market trends and potential opportunities.
This can put a huge strain on an advisor and make it difficult to strengthen client relationships. So, how can financial advisors make portfolio construction easier and less time-consuming?
Let’s start by considering what parts of the portfolio construction process cause the biggest headaches for advisors.
About 55% of all financial advisory practices construct custom investment portfolios for their clients. Evaluating asset classes, balancing different investment vehicles, conducting due diligence, adapting strategy to the market—portfolio construction may represent one of the more arduous tasks that financial advisors tackle each day.
In fact, research suggests that only 7% of advisors are equipped with the time and resources it takes to conduct portfolio construction effectively. What does that mean for the other 93% of advisors?
Here are four common investment portfolio challenges that advisors face, making it harder than ever for advisors to effectively construct balanced and lucrative portfolios.
As current affairs shape the market, financial advisors often decide on whether their investment style should focus on value, growth, or a blended approach.
Balancing clients’ investment portfolios is a very delicate act that depends on market conditions and the client. Advisors need to dedicate time to understanding each client’s expectations, challenges, and goals before choosing an investment strategy.
Balancing Values Investing Against Performance
Not all investment objectives are measured by profits alone; environmental, faith-based considerations are two examples of things that might be included in your investor’s objectives list.
To help clients balance values investing with performance, advisors need to conduct thorough research on responsible investment options and how they can align with the client's specific values and financial goals. This involves understanding your client’s ethical concerns, social impact preferences, and risk tolerance while still seeking competitive returns that align with their financial goals.
Many investors and financial advisors still believe that the U.S. is the center of the equity world—especially if they’re American—but this isn’t necessarily true anymore. International markets have many attractive investment vehicles to offer. Today, a diversified investment portfolio may include a healthy dose of international asset allocation in order to strike the right balance.
This is especially true since the U.S. market tends to focus more on growth stocks, while many international markets have a stronger focus on value. Thus, an intentional tilt to value may require more international exposure.
It’s important to remember, however, that international stocks aren’t a monolith; Europe, Asia, other regions of the world, and the countries and businesses within them are all subject to different forces and risks that make investing in those regions more or less appropriate for your clients. It can be a heavy lift to analyze which international stocks are a good fit for your clients’ portfolio. Advisors who are strapped for time might be tempted to just stick with the U.S.-based assets that they’re most familiar with.
Even for financial advisors that relish the construction of a robust, well-balanced investment portfolio (and have the time to do so), the reality is: they still have to manage clients’ reactions to the latest news headlines and global events. Sometimes, clients may ask their advisor to make changes to their portfolio based on which investments are popular or which direction they think the market is going.
However, there is rarely a benefit to abandoning sound investing principles in response to such requests.
For example, most portfolios should include fixed-income investments to act as long-term ballast, such as Treasury bonds. If your client has a low-risk tolerance but is wondering why they’re invested in low-yielding bonds instead of a popular but volatile stock, effectively communicating why you’ve constructed their portfolio to include different asset classes is essential.
How to Talk to Your Clients About Market Volatility
When discussing market volatility with clients, advisors should maintain open and transparent communication. It's essential to educate clients about the nature of market fluctuations and the importance of staying focused on long-term financial goals. By reassessing risk tolerance, reviewing investment strategies, and emphasizing the benefits of a diversified portfolio, advisors can help clients navigate and mitigate the impact of market volatility.
As a financial advisor, you can use your advantage of being emotionally removed from the performance of a given portfolio. This distance enables you to provide unbiased investment advice and guidance to your clients if certain assets start to underperform, ensuring that their investment decisions are based on research and evidence rather than emotion.
Any well-diversified investment portfolio will have underperforming elements in a given year or quarter. Without diversification, a portfolio might perform very well one year when the market conditions are just right and perform disastrously the next year when conditions change again. With the right mix of assets to hedge for volatility, one asset or the other will provide lower returns.
On top of that, it’s crucial to create a portfolio with a healthy balance of liquidity so your clients don’t find themselves locked into long-term investment goals. For example, real estate may offer a potentially huge payout down the road, but it’s not easy to offload quickly at full value if your client needs sudden cash for a health emergency. And, while bonds are easy to cash in instantly for short-term use, their payout is much smaller than some of the long-term investments.
Financial advisors need to listen to their clients, understand their goals, have a firm grasp of their time horizon, and pinpoint their actual risk tolerance. Starting from here, they can build investment portfolios that speak to those needs and support a realistic budget.
Manage Expectations with Client Reviews
When managing expectations with clients, use honest reviews to help communicate clearly and honestly about what they can expect from your firm. Use data-driven insights and benchmarks to provide context for their investments' progress. Proactively address any concerns they may have, reinforce the importance of staying committed to their long-term goals, and make appropriate adjustments to their financial plan when necessary.
Apply Learnings from Client Feedback
To use client feedback effectively, actively seek input through regular communication channels like surveys or face-to-face discussions. Listen attentively to understand their needs, concerns, and preferences. Incorporate their feedback into your practice by making necessary adjustments, enhancing services, and ensuring a personalized and valuable experience for each client.
None of these challenges are insurmountable for a financial advisor, but they all require time. As requirements increase, you may feel stretched to address each one effectively—let alone address these challenges and sustain a robust relationship with your clients.
Conducting due diligence into individual investment products and strategies, evaluating market conditions, and conveying the reasoning behind your decisions to clients are all highly time-consuming tasks. Spending your time on these activities means you spend less time on other important initiatives, such as:
For these reasons, many financial advisors decide to outsource investment management.
On average, advisors that outsource 90% – 100% of their assets under management (AUM) save over eight hours per workweek. Gaining a full day back in the workweek while reducing your to-do list makes it a lot easier to fit everything in!
When financial advisors outsource non-core tasks, they can increase their capacity to take on more clients and offer personalized services without compromising quality. By leveraging specialized expertise and efficient processes, outsourcing enables advisors to maintain a high standard of service while expanding their practice and delivering value to a broader client base.
Outsourcing allows you, the financial advisor, to provide a better client experience by freeing up time to focus on personalized advice and relationship-building. Specialized experts can handle various tasks, like investment management and administrative work, to ensure greater accuracy and efficiency in serving your clients. With the right partner, the power of outsourcing can help you deliver high-quality, customized services to enhance client satisfaction and strengthen long-term relationships, fostering trust and loyalty.
For some, the love of investment management was the reason why they launched their financial advising career. The idea of outsourcing this enjoyable element of their work may leave such advisors feeling a bit deflated. Most importantly, the financial advisor understands their clients’ goals best; could a third party translate those goals into a tailored investment portfolio any better?
That’s why AssetMark provides the ability to develop custom portfolios consisting of different investment strategies. With this approach, investment advisors don’t have to worry about conducting due diligence into asset classes, picking and choosing granular investment vehicles, and all the other tedious elements of portfolio construction that have a poor return for all the time spent. At the same time, advisors can still build custom portfolios that speak to each investor’s needs as they know best.
For example, at AssetMark, a financial advisor might want a passively implemented equity exposure for a client’s portfolio, but with an active bond strategy. Rather than picking between an all-passive, all-active, or balanced portfolio, an advisor working with AssetMark can plug in one of a variety of active bond rotation strategies into their otherwise passive portfolio.
Financial advisors working with AssetMark still have the option to construct portfolios tailored to their clients’ needs; just instead of building portfolios by asset class, they build portfolios by strategy.
You get to choose the kinds of tools, services, and resources that you want from AssetMark. As a turnkey platform, we can help you with any aspect of your practice.
If you’ve got more questions about what outsourcing investment management with AssetMark looks like, don’t hesitate to reach out to our team. If outsourcing is a new topic for you and you want more data on what outsourcing portfolio construction and investment management could look like, we recommend reviewing our study, The Impact of Outsourcing Investment Management.