PIM, PMP, etc

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Oct 28, 2009 6:42 pm

Folks - here's something I struggle with.  All the academic literature says "you can't (or don't) beat the index....no one does.  Therefore managing a discretionary portfolio is likely a fools errand.  The wirehouses tout asset allocation and institutional solutions....agreed?

 
FAs who pick stocks claim they do better.  The guys I'm thinking of are all bright, hard-working, and don't give me BS (or I'm not smart enough to detect it :))
 
A) Are they both right and am I missing a variable -or-
B) Are the efficient portfolio guys right -or-
C) Are the portfolio FAs right and I'm giving the academics too much credit.
 
It occurs to me that all the wirehouses have access to performance results, and if the FAs performance was worse than the institutional solutions - Jamie Price et all would definitely tell all the brokers that "PACE Select" beats discretionary portfolio managers.
 
Comments?
Oct 28, 2009 7:35 pm

"TACTICAL" asset allocation is the most responsible for portfolio returns.

The reason why PMP (discritonary program at UBS) is growing like crazy and all the large FA's and teams are doing it is because you can move your 5% overweight to TIPS with a push of one button and not have to make 150 phone calls.

Also the money managers got crushed in 08 downside capture was out the window. FA's need a new value prop. "I can & will get you out if it gets to bad" is what they are promising and putting themselves personally accountable instead of some unknown fund manager.

Oct 28, 2009 7:42 pm
NOVA:

Folks - here's something I struggle with. All the academic literature says "you can't (or don't) beat the index....no one does. Therefore managing a discretionary portfolio is likely a fools errand. The wirehouses tout asset allocation and institutional solutions....agreed?



FAs who pick stocks claim they do better. The guys I'm thinking of are all bright, hard-working, and don't give me BS (or I'm not smart enough to detect it :))



A) Are they both right and am I missing a variable -or-

B) Are the efficient portfolio guys right -or-

C) Are the portfolio FAs right and I'm giving the academics too much credit.



It occurs to me that all the wirehouses have access to performance results, and if the FAs performance was worse than the institutional solutions - Jamie Price et all would definitely tell all the brokers that "PACE Select" beats discretionary portfolio managers.



Comments?





Maybe you beat the indexes long term, maybe you dont.



I think that is secondary.



Where we add value is evaluating a person situation (assets, age, risk tolerance etc etc ) and coming up with a long term plan and asset allocation that makes sense based on history. Then lowering their expecations and being there for them when they want to waiver from the plan. either with greed (90's) or fear (march).   



I believe that stocks go up over time and assets classes with revert to their norms.

I believe you must have some equities for inflation. I don't think it is ever "this time its different"



You should execute this for people at a fee that you're ok with over a long term time horizon. Something you would charge your mom.



I believe that if you follow the above that you will meet your long term objectives.   A bonus would be to beat the indexes but it is NOT what is MOST important.



The NEXT issue is HOW you want to do this.



I think that pim, pia, gpm, pspm, pmp is the way to go.   You can discount because firm takes nothing.   You can control cap gains and get people to -3000in losses in the majority of years (huge over long haul).   The buck stops with you and your people. the connection with people is so much stronger since you are running the money. they deal with YOU-period.

It takes balls.

Its a heck of a lot more interesting and fun to manage your own portfolios.

we know our clients so it allows you to be flexible with them.   Back in the day when I used money managers it would drive me nut when someone would be upset with a manager and there was nothing you could do.



At WFA they would give and excel spread sheet with all the PIM manager returns. You were given a number so it was private. That was the first time I had even seen how individual FA's were doing. The firms never show it.   



It blew me away how DAMN good the numbers were. No joke.

The vast majority of guys with decent books (it would show assets and numbers of accounts) were killing the indexes.

It is not as hard as you think.   You have such clear vision without any commissions and you ass on the line to perform for people.

My partners and I have been doing this for a good while.   We have really great long term numbers.   We have killed the indexes.   I always UNDERSELL performance BIG time. I only use it when I have too.   I always say we will probably do much worse. I make performance number 5 on the list of what is important (which is true).

If we are in a bull phase and doing well I always tell people to stop talking about it. that we are lucky and its probably going to get worse.   

I think the FARTHER away from the market you can get your people the better off they will be. this is counter to the meet people quarterly crap they teach you. The best client in the world to me is the one that IGNORES the market and focus on living his/her life and looking out long term.

   

Oct 28, 2009 7:45 pm
ABOM:

"TACTICAL" asset allocation is the most responsible for portfolio returns. The reason why PMP (discritonary program at UBS) is growing like crazy and all the large FA's and teams are doing it is because you can move your 5% overweight to TIPS with a push of one button and not have to make 150 phone calls.Also the money managers got crushed in 08 downside capture was out the window. FA's need a new value prop. "I can & will get you out if it gets to bad" is what they are promising and putting themselves personally accountable instead of some unknown fund manager.





I agree with all of this except "I will get you out"   

That is a lie and market timing does not work.



the value prop is not new : a plan and long term approach    

Oct 28, 2009 7:53 pm

Thanks ABOM and Shanie (Shania - you used more words per sentence than I've ever seen you use.  Great job!)

 
Thanks guys - hopefully we
ll get more replies in the AM.
Oct 28, 2009 7:53 pm
Shania Twain:
ABOM:

"TACTICAL" asset allocation is the most responsible for portfolio returns. The reason why PMP (discritonary program at UBS) is growing like crazy and all the large FA's and teams are doing it is because you can move your 5% overweight to TIPS with a push of one button and not have to make 150 phone calls.Also the money managers got crushed in 08 downside capture was out the window. FA's need a new value prop. "I can & will get you out if it gets to bad" is what they are promising and putting themselves personally accountable instead of some unknown fund manager.





I agree with all of this except "I will get you out"   

That is a lie and market timing does not work.



the value prop is not new : a plan and long term approach    



both great post shania. I agree with what u said -- the value prop of getting them out is a lie. i was conveying what I hear some discritionary fa's saying nowadays.

Oct 28, 2009 7:53 pm

as someone who utilizes a discretionary program almost exclusively, I can tell you several reasons I made the conversion:



1. organize your book...simply put why do many producers do different things for every single client? have a portfolio or two, or three, and put everyone in them in differing ratios according to their allocation - that way everyone is on the same page



2. inability to control risk: forget trying to outperform and efficient or inefficient...this business over the past decade has been about controlling downside risk during fast moving times. Upside doesn't mean nearly as much as losing a retiree 30% (like many managed accounts and mutual fund advisory programs have done). A discretionary program allows you to control risk very quickly



3. Who says these discretionary guys are trying to outperform? many simply use portfolios with ETFs - so they are in index funds - guaranteed NOT to outperform!



4. This is becoming a revolution, in my opinion...for two reasons: if we ALL become fiduciaries, wouldn't you rather be the one making choices for your accounts, or do you want clients doing it for you? and secondly, the RIA model, in my opinion, has displayed great success because of this discretionary type of approach...the model has worked, and will continue to work



5. it seems you are only focusing on equity markets...imagine putting fixed income into a discretionary program - where you wouldn't have to call the old widow lady every time $50,000 matured and spend an hour trying to convince her a high quality corporate bond is safe. As long as you can justify the fee in the fixed portfolio, it's a great idea...and doesn't restrict you like a managed account or mutual fund does. In a managed fixed portfolio, usually the manager has a style they have to stick to...like just munis, or just agencies, or just corporates. with a discretionary model, you can go anywhere in the fixed income world and use any vehicle...individual bonds, funds, or etfs



6. the BIGGEST reason I committed to this approach was a simple question a prospect asked me once...while I was early in my career and showing them a potential portfolio using four managers in four accounts. He asked me "I know you show me how these managers have done over time, but how do I know how YOU do in moving money between these managers, or selling when we need to sell, or buying more when we need to add?" Great question - my guess is that the typical client has no idea that the average advisor truly can't show them how they have maneuvered in and out the past decade. This is the reason many articles recently have centered around how clients AND advisors never really make any money. A discretionary portfolio, with a performance track record, will begin to answer that question for your clients and prospects



it's the wave of the future...



Oct 28, 2009 8:23 pm

Great response again.

Oct 28, 2009 8:34 pm

Without writing a novel, per above posts. Nova - It's not the platform that determines success. You can't compare PMP with Pace. IMO, Discretionary fee based is the ONLY way to responsibly manage money! No contest. All clients receive the same execution. No discussions...We are hired to manage money..so manage the money. We need to move to cash,...Oh...ok let's move to cash, I get paid the same...no conflicts! The pre packaged managed money potfolios like MFA at ML, that are run by the really smart guys in princeton, proved that they really add liittle value (all down 35 + %) "but compared to the indicies we were 150 bps ahead" Sorry dude, you need to save me more than that!

Oct 28, 2009 8:42 pm

OK pewter - do you manage portfolios at the stock level?

Oct 28, 2009 9:32 pm

Some really great posts on this thread.

I agree that its the right way to go.
When i first started, 10 years ago, i did some discretionary portfolios and also started using money managers. I was all over the place. Admittedly i also didnt know jack about managing portfolios of individual stocks. I would get an account opened and put all the money to work on day 1. That was in 1999 and i shudder when i think about it.
 
But slowly i learned. I also learned about money managers and FA's providing "consulting services". I learned that when we use money managers we were "bringing institutional level money management to retail investors" .
Well, thats true, but the problem is that institutional money management is for institutions. Retail clients dont really care about all that crap. And they are not capable of understanding it when their portfolios are getting creamed.
Give a piece of your clients money to a large cap growth manager (or fund) and he will stay invested in large cap growth, even if he sees a freight train coming at him.
About 4 years ago, i started to do more discretionary management on my own, using ETF's and stocks, and i became very tactical. At this point i have eliminated all of the SMA's from my book, and i am happy i did
The comment that FA as the manager creates a bond with the client is dead on. I really believe that when i made a move to Indie, thats why pretty much every client came with me. They felt they were doing business with and depending on, me, not some platform.
Thats the beauty of running your own SMA's besides the scalablility.
 
Oct 28, 2009 9:53 pm

Great posts.  Makes me glad I started discretionary portfolios this year.  Wish I had done it sooner, but better to start today than never.  I will certainly agree that it is more fun, & exciting than using SMAs.

Oct 28, 2009 10:54 pm

Great information and topic, thanks for the insights.
I am not able to use a discretionary platform in my current environs, but when I go RIA in the future that is my plan.

That said, I'm curious about a few things:

1) Did any of you move to cash over the past couple of years? 
2) Do you still charge the same fee if you do so (my thought would be yes)?
3) Do you use more macro-economic & market indicators to get you out, or individual sector/stock indicators?
4)  What is the break-down of indiv stocks vs. ETF/ETNs that you all use?

I like the idea of a core/satellite, tactical strategy using primarily ETFs/ETNs, with a sparing amount of equities.
Indiv stocks (research & monitoring) would seem to be enormously time consuming to balance with prospecting & client meetings. 


Oct 29, 2009 1:22 am
iceco1d:

Discussed here...

http://forums.registeredrep.com/forum_posts.asp?TID=6299&KW=Portfolio+Management&PN=7

In depth.


 
Wow that brings back memories.  Here is my favorite part of that thread:
 
I'd have you manage my money before most people in this business if you had to use individual securities.  Your points are wrong...but way "less wrong" than most.  It may not seem like a compliment, but it is.          
                                                                        Iceco1d   June 2008
Oct 29, 2009 1:40 am

You and me both.  Reminds me of a time when you could actually get into an intelligent discussion on this board, although I have contributed to some of the garbage myself.

Oct 29, 2009 6:25 am

Nova - no stock for me. I believe there is success there, just not my thing. I like when I want to buy a bond or fund, I can choose relative amounts for 100 clients, and own it in 30 minutes. I simply cannot have discussions with clients about which mid cap value manager we are going to place in their portfolio. Will I beat other professional money managers or the S&P sometimes...but I have control & am streamlined and efficient, and when reviewing accounts....everyone owns a variation of the same investments bought roughly at the same time. Why anyone who had the ability to manage money this way would not do it, is beyond me.