Investment Strategies

By Linda Leitz

Some financial advisors believe when they provide investment management, they are doing financial planning. CFP^® professionals realize investment work is a key part—but not the only part—of integrated financial planning. An intentional and intelligent approach to investments is important. And there are various ways to approach this part of our discipline.

Model Portfolios

Richard C. Salmen, CFP^®, CFA, EA, chief executive officer of Family Investment Center, Inc., finds the use of model portfolios efficient and effective with the firm’s clients, who are primarily middle and upper-middle-class individuals and families. These portfolios are implemented through the firm’s software, Orion. Salmen shares, “When the markets make rapid moves like they did in March 2020 and during 2022, we were able to rebalance and reallocate large numbers of accounts quickly and efficiently.” Larger accounts holding preexisting positions with embedded gains are managed with or without customized models. The firm continues to create and modify processes around these exceptions.

Alyssum Malone, CFP^®, BFA^™, wealth advisor with Buckingham Strategic Wealth, shares that model portfolios avoid “reinventing the wheel” for each client. “We believe strongly in our evidence-driven investment strategy and have a wide variety of model portfolios depending on clients’ time horizon, risk tolerance, and preferences,” she says. Her experience is that clients are appreciative of the consistency of the approach, using funds that are well researched and monitored on a regular basis. It gives clients confidence in the process.

Types of Investments

A few decades ago, financial advisors were judged by their ability to pick stocks but active management of individual stock portfolios by advisory firms is less common today. In addition to mutual funds, exchange traded funds (ETFs) are much more common than stock pickers.

Malone shares that Buckingham does not use actively managed funds, instead using passively managed funds, index funds, laddered individual fixed income instruments, and alternative funds. A focus is keeping fees low and managing taxes. She notes, “Buckingham is very focused on evidence and the science of investing.”

Salmen and his firm have been using ETFs more than mutual funds. “We have serious concerns about the performance drag created by passive index reconstitution when so many securities have to be bought and sold on the same day,” he says. “These fundamental ETFs do not suffer from that challenge.” They use ETFs that have a robust market to minimize the chances of bid/ask spreads widening during periods of market disruptions.

Active or Passive

After the active stock picker era, actively managed mutual funds gained popularity. In search of lower fees and better performance, index funds were developed and gained popularity. There are a variety of indexes. While the structure of an index fund is determined by the relative index, these indexes can have their own pitfalls. When stocks are added to or removed from an index, the market implications for those stocks can be substantial. And when individual positions grow to an outsized percentage of an index, diversification may be lowered. Consumers—and some advisors—have assumptions about index construction that might not be correct. While the name of an index might suggest its target holdings, there may be some decisions made when the index is reconstituted each year that don’t necessarily match what investors and advisors believe about it.

Dimensional Fund Advisors LP (DFA) has a different approach than either active or strictly passive, based on research. Rob Harvey, CFA, co-head of Product Specialists and VP at DFA shared, “Dimensional sits between traditional active managers and index managers, seeking to achieve the potential benefits of both with the drawbacks of neither. Similar to many index-based approaches, Dimensional funds are broadly diversified, low cost, and use the market as a starting point for all portfolios. However, Dimensional’s focus on active implementation and rigorous empirical and academic research has enabled Dimensional the ability to outperform indexes throughout time. Outperforming a benchmark is the goal of all actively managed strategies but Dimensional’s track record across asset classes and regions highlights the benefits of having a systematic approach to investing. Using information in market prices daily, incorporating available research on expected returns, reducing operational costs, and focusing on outstanding implementation are the components Dimensional uses to pursue a better investment experience across our product suite.”

Advice Without Implementation

Some consumers want to manage their own investments but would like the insight of a professional. This may be based on a desire to save on advisory fees, discomfort with giving up control, security concerns with turning over trading authority to an advisor, or other more unique reasons.

Susan Einberger, CFP^®, EA, MBA of Enjoy the Ride: Financial + Life Planning, provides integrated financial planning, including investment advice, but does not manage investments. Einberger finds advice without direct management of investments streamlines onboarding and offboarding clients and simplifies regulatory and compliance issues for the financial planning practice. While Einberger is a fan of Vanguard, she finds clients like the autonomy of being able to choose their custodian. She gathers statements for investment reviews, which happen at least annually, making recommendations with detailed notes and instructions for reallocation in accord with client goals and risk tolerance. Philosophically, Einberger believes in the efficiency of markets and that beating the market isn’t a reasonable intention. “I build diversified portfolios with low-cost index funds; the investing doesn't need to be complicated,” she says. “It's my tax planning strategies and keeping clients on track (i.e., preventing the big mistakes) that has reliably built net worth. Lastly, I have an educational approach and want the clients to be involved in their financial decisions. It doesn't work well when a client tunes out because their advisor manages their money.”

Many Right Solutions

The potential processes, tools, and philosophies that can incorporate investment advice into a financial planning practice are varied and countless. Stock picking and active management have given way to low-cost, efficient investment strategies based on evidence and research. Integrating investment choices with tax strategies, cash flow needs, and the other elements of financial planning serves clients well and makes the services we provide more than “just” investment management.

---

Linda Leitz, a NAPFA-Registered Financial Advisor, is a CFP^® professional with Peace of Mind Financial Planning, Inc. in Colorado Springs, Colo.

image credit: istock.com/bagi1998