When financial advisers craft portfolios, their clients
assume holdings are tailored to the client’s needs and risk tolerance. But a
recent study finds the asset allocation in an adviser’s own portfolio might be
one of the biggest factors in determining what a client’s portfolio looks like.
Mr. Linnainmaa, along with three other college professors
from the U.S. and Canada, analyzed data from 5,920 Canadian advisers who earn
commissions and nearly 600,000 of their clients, looking at asset allocations
in their portfolios and other criteria such as age, gender and risk tolerance.
In one batch of data, the researchers studied investors who
have the same demographics and risk tolerance but have different advisers. It
was determined that the correlation between an adviser’s portfolio and that of
his or her clients is about 0.25, a significant number.
In practice, that correlation number would mean that if
there are two advisers, and one invests 20% in equities for his or her own
portfolio and the other invests 60% in equities, then on average all of the
clients of the second adviser are likely to hold 10% more in equities in their
portfolio than those of the first adviser.
The study’s authors say it wouldn’t be unreasonable to find
similar behavior among U.S. advisers. Stephen Horan, managing director and
co-leader for education at CFA Institute, a nonprofit association of financial
analysts, says he isn’t surprised by the findings. Such biases and preferences
creep into other professions as well. Still, many experts say some clients
might be fine with holding similar funds or investments to their advisers. But
ultimately they’re under the belief that their portfolios reflect asset-allocation
customization based on their own risk tolerance, time horizons and
demographics.
There are ways advisers can check their preferences and
safe-guard against creating portfolios that are clones of their own, experts
say. Financial advisers should keep good records of their major investment decisions,
both successful and unsuccessful, and be sure to read credible opinions that
are different from their own, whose firm manages about $1.7 billion. This helps
to restrain their overconfidence and prevent them from becoming too enamored
with a particular strategy, asset class or investment mix.
Meanwhile, the CFA Institute’s Mr. Horan suggests making
good use of the investment policy statement, which is a document and common
understanding between an adviser and a client about the basic purpose of the
investments, the basic parameters that should govern those investments and the
basic outline of the investment strategy.
Another take on the investment-policy statement is to get
the client fully integrated into the process of putting together the portfolio.
For instance, Christopher Sidoni, a senior adviser with Gibson Capital LLC in
Wexford, Pa., starts with a data-gathering discussion where he tries to learn
from clients about their risk aversion, historical preferences, various
experiences with different asset classes and so on. Then, the conversations
shift to thorough discussions about portfolio construction and education about
different asset classes and allocations.
It can be time consuming and labor intensive, and there can
be a barrier to performing such services if a firm has too many clients. Of
course, even this strategy isn’t 100% foolproof in protecting against advisers
slipping in their own preferences and biases in client portfolios. But that
doesn’t mean it isn’t a big step in the right direction.
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