Financial advisors wear many hats: business owner, relationship manager, big-picture thinker, plan creator, investment manager, and more. But sometimes the weight of those responsibilities can do more harm than good.
We are going to introduce you to a topic that might shock you but will inevitably change the way you do business and improve your client experience model. Ready? Here it is:
It’s time to fire yourself as the investment manager.
Hand-selecting investments for hundreds of clients won’t deliver the optimum value your clients deserve and will take you away from the parts of the job you do best: guiding your clients through their financial journey and helping them craft the best plan to reach their goals.
How can you move away from the nitty-gritty of investment management? Adopt a centralized investment management system.
- What is this system?
- How does it work?
- In what ways will it actually improve your practice and client satisfaction?
We can’t wait to dive into this and more with you all here today!
Step Away from the Investments
You might be one of those rare advisors who is incredible at investment selection and management. If so, good for you! But so many advisors find that this isn’t where their strengths lie and yet it takes up a majority of their time to properly execute.
When advisors handle the investment arm of their business alone, they manage the moving pieces of all client’s accounts at a time which can lead to a few important issues:
- Too much variance on three distinct levels: client, account, and investment options
- Advice becomes dependent on market cycles
- No formal investment management process
With a centralized investment management system, it doesn’t have to be that way. This process shoulders this responsibility and allows the advisor to manage the investments at a high-level as opposed to being involved in each individual trade or transaction.
What is Centralized Investment Management?
Centralized investment management is a key feature of the structure and operation of CX Institutional. While the term can express many different meanings, in our case it refers to a team of non-client-facing members that serve the needs of clients and advisors. The team is responsible for the investments, trades, analytics, and compliance that are associated with the investment sector of the business.
For us, our team manages all aspects of investments for clients and advisors. This has led to a sophisticated system that allows us to best manage the unique needs of our clients, deliver optimum value, and ease the investment burden from advisors. In addition to general investment work, the central investment management team at CX Institutional handles organizational complexities like:
- Generation and execution of trades
- Trade auditing
- Account-level compliance
- Cash management both at the account level and household level
- Billing and billing audits
Our processes set advisors and clients up for success as it removes organizational obstacles and unnecessary complexities from the mix. Essentially, a central investment management team analyzes and executes investment decisions on behalf of the advisor. Advisors still craft the investment plan, but our team executes the operational duties associated with maintaining and managing that process.
How It Works at CX Institutional
Each company’s central investment team can be set up in a unique way. At CX Institutional, our team is non-client facing and serves all investment needs across the company. Being internal, we are able to create our own process and strategies that we know will perform best. We do this through our investment policy committee (IPC) as well as our commitment to Global Investment Performance Standards which we will talk about a little bit later.
We have 14 different individual equity strategies and also have separate fixed-income strategies. Each strategy epitomizes a different investment plan aimed at targeting the goals of the investor. Capping the number of strategies gives us the ability to best manage our advisor/client needs. These strategies were developed, and continue to evolve, by our IPC.
Selecting a strategy depends on the client’s assets, risk, desired market exposure, and goals all of which we get from the advisor who manages the relationship. All accounts are evaluated daily and we even have the option to customize investment strategies down to the account level. So One account could employ 2 or 3 strategies, for example.
We can do that by tracking each subset of the account on an individual basis and break down the account to optimize performance. So while we can view a $500,000 account through the lens of multiple strategies, for custodial purposes it is just one account. We are able to clearly and efficiently present this information to advisors in order to provide a comprehensive view of the account’s performance metrics.
Improving the Client Experience
At the end of the day, how will this process improve the way we work with clients? When using a centrally managed strategy, the clients are able to get the same experience, and not worry about the heightened level of variance in the type of investments they get, which trades happen, and when they happen. This brings consistency, which we know is key, to all client operations.
This system is a huge value-add to clients, especially during these volatile times. Our ability to employ tax-loss harvesting across all clients equally has allowed us to add additional value across the board. A couple of components that make the centralized investment management system work for us are the IPC and the GIPS. Let’s take a closer look at what these are and their role in the client experience.
Investment Policy Committee
The Investment Policy Committee plays a critical role in establishing parameters that guide our advisors toward industry best practices. Contrary to what you might think, it isn’t a group of people debating on business sectors, economies, and projected stock performance. Rather this committee employs tactics that aid in the creation of the investment strategies themselves by:
- Analyzing risk limitation
- Diversification guidelines at the strategy-level and firm-level
- Performance analysis
- Process and workflow
- Presentation materials
The ultimate goal of the IPC is to remove complexity or misunderstanding for the clients. This team helps clearly define what the clients own and how they are invested at our firm.
Here at CX, our IPC consists of many important professionals such as advisor partners, analysts, and compliance personnel. This team builds best practices and promotes those throughout each facet of the investment management platform. This is done through qualitative research, equity strategies, and fixed income strategies. All of these pieces contribute to the overall client experience and also a clear path of success for the advisor.
The Global Investment Performance Standards is among the biggest benefit of our central investment management system. These are voluntary standards set by the CFA Institute that outline the most ethical and transparent way to indicate investment performance.
This entails third-party auditing and verification, analysis of investment performance overview. By adhering to this standard, we will never show a hypothetical performance snapshot to a client or prospect. Many advisors can’t say the same.
Our team at CX Institutional has accepted these standards in order to provide clients with the optimum experience and complete confidence that we are telling them the truth and not showing them any projected performance data that wasn’t verified. With GIPS, our performance data is under a microscope, and we are okay with that and are proud of our performance over the last several years.
How does it work?
Our clients receive a third-party verified report that illustrates the way investment objectives performed at certain levels. These reports can take into account a multi-strategy platform, so if you are using a few different strategies, you can still see an accurate report. To put that in perspective, there are only 1,600 firms globally that claim compliance with GIPS standards.
This standard is positive for enhancing the client experience as they know that they are receiving unbiased, 100% true advice, not a hypothetical snapshot.
Why It’s Better for Advisors
Let’s start off this section with an example.
The volatility with COVID-19 has been a tremendous example of the leverage of the centralized trading team for advisors. The notion comes through tax-loss harvesting— how to swap out similar assets, maintain the exposure, and give the client the tax alpha that is needed.
Our team will come up with the best solution which could be a short-term swap from one strategy to another. We then ask the advisor if the plan makes sense and once we get the green light we put the plan in action.
A top concern we hear about adopting a centralized investment strategy is the advisor’s fear of not being involved in the investment planning process. But this couldn’t be farther from the truth.
The advisors are entirely involved in the selection of the strategies. We may have the menu of equity strategies and fixed income components, but the advisor directly selects the investment objectives. They also have control over internal tools like allocating a household based on strategies, and risk-adjusted GIPS data.
The advisors structure that household or that account based on what they think will best achieve that client’s end result like value vs growth strategies, dividend factors, market sectors, economies, and more.
Those nuances aren’t guided by the centralized investment management team. The data that comprises those strategies are, but the actual selection comes from the advisor and whatever they think is best for that financial plan and for that client.
The key thing to remember here is: The role the advisor plays is not necessarily to pick the stock but to explain and guide the client through the investment process. Investors need a guide, and the advisor plays that critical role.
Ready to Learn More?
Our team loves creating accessible resources for advisors and this week it is a brochure to use with prospects and clients. This illustrates the different roles played by the investment management team and the financial planning team.
You can access this from our resource center or click the icon below. We really encourage you to check out all of those tools, white papers and documents there. They can really help you become a more effective financial advisor.
Interested in how a central investment model can help you? Give us a call.