A relatively simple function that should be on every money manager's service offering is stock-blocking.
In the past several years, as retail individually managed account (IMA) programs have taken off, money managers have rolled up their corporate sleeves and put a lot of muscle into marketing. But if money managers want to compete for these assets in the future, they will have to adapt their portfolio management practices to meet the needs of high-net-worth investors. Going forward, the winners in the war for assets will be the money managers who figure out the difference between managing institutional money and managing individual money.
Quality Investment Disciplines
Obviously, a successful IMA manager will need a time-tested, quality investment strategy. The style should differentiate the manager from his peers, and the more easily understood it is, the better. Advisers cannot promote or defend something they don't understand.
Accept Low-Cost Basis Stock
Most high-net-worth investors have low-cost basis stock, and they're beginning to understand the inherent risk in holding it, and the tax implications of selling it to diversify. Investors are looking for money managers who can propose solutions, from total sale to partial sale, to holding the stock and diversifying around it using other money.
Tax-Loss Harvesting
A good after-tax IMA manager will employ tax-loss harvesting to raise the cost on the investor's portfolio gradually. A buy-and-hold strategy, although tax-efficient short term, can create long-term tax issues because it creates an inflexible portfolio.
Tax-Lot Optimization
Factoring the tax-lot cost into traditional portfolio optimization protocols makes an already complex process even more complicated, but current technology and new tech tools just around the corner make it possible, even today. Tomorrow, investors will be demanding it.
Besides harvesting losses to reposition the portfolio internally, winning money managers will entertain requests to offset realized gains and losses outside the portfolio. If you can offset, say, a $50,000 gain from a condo sale by realizing $50,000 in losses in the portfolio, you've positioned yourself as the guy who made it unnecessary for the client to write a $10,000 check to Uncle Sam. Talk about relationship cement!
Fulfillment Capability
Moving away from tax-oriented management, the ability to service client needs includes the willingness to manage a portfolio around a large central holding. A highly compensated executive may have stock, options and job exposure to a single stock. Successful money managers will be able to avoid, not just that stock, but the entire industry or sector, if necessary.
Security Blocks
A relatively simple function that should be on every money manager's service offering is stock-blocking. For example, if the model portfolio holds chemical stock A and the client doesn't like their environmental policies, the winning manager will be able to block company A and replace it with an acceptable stock from that sector or industry.
This is just a partial list of the characteristics that will separate the winners from the losers in the IMA industry of the future. Efficient trading policies, effective client communications, the ability to extend these services to an expanding client base without sacrificing the quality of the service or the integrity of the process — all these will be weapons in the arsenal of money management giants 10 years from now.
Len Reinhart is president, CEO and chairman of Lockwood Financial Group, an investment management consulting firm with offices in Malvern, Pa., New York and Dallas. He also serves on the board of the Institute for Certified Investment Management Consultants. He can be reached at [email protected].