Planit:How Do You Use Asset Allocation in Web Advisor?
From Planipedia
The Asset Allocation components of the Web Advisor are recognized in the industry as one of the most dynamic in any planning software available. This is because at PlanPlus we are committed to being responsive to the needs of advisors and are willing to make adjustments when research and changes in our industry indicates it’s wise to do so.
Asset Allocation Methodology
Within the Web Advisor we have three alternatives relative to how we illustrate the asset allocation of a particular product. Let’s look at each of these.
Summary Method – This method of allocation uses the standard Canadian Investment Funds Standards Committee fund classifications to identify the asset class a fund falls into. With this method, a fund classified as a “Canadian Equity” would be identified as having an asset allocation of 100% Canadian Equities. Balanced funds are assumed to hold a mix of 50% fixed and 50% equities, depending on the geographical type.
Detailed Method – This method as the name implies is more elaborate in that it recognizes the underlying asset allocation of a fund based on the Funddata information available. In this case, a Canadian Equity Fund might be identified as having 7% in Cash; 5% in Short Term Fixed; 6% in Fixed Income; 60% in Canadian Equities; 15% in Canadian Small Cap Equities; 3% in US Equities; 2% in US Small Cap Equities and 2% in International Equity.
Balanced Method – This method is actually a combination of the Summary and Detailed method. The approach is to look at all funds as falling into one of two categories.
- The first category is for funds that are “Balanced” or “Asset Allocation” funds.
- The second category is all other funds that don’t fall into the first category.
With the Balanced method, the summary method of allocation is used for the non-balanced funds and the detailed method is used for all the balanced or asset allocation funds.
Now that you understand these three allocation methods, let’s look at some of the issues associated with these methods.
First, we consider the Summary Method to be least desirable since in particular, balanced funds and asset allocation funds with this method do not reflect the true underlying allocation for which you recommend them. For example, when you choose an Asset Allocation type fund, you want to reflect the underlying allocation into Cash/Fixed/Equities in a more detailed manner as you are using those funds typically as a way of transferring the job of portfolio re-balancing to the fund manager. This reduces the time you must spend on minor adjustments to the client’s portfolio and lets you focus on selecting the right portfolio manager.
Second, when we consider the Detailed Method, we typically find that every advisor and corporate deployment initially wants this method to be used simply because it sounds great. The detailed underlying allocation seems the most accurate and great way to approach the allocation decision. However, what must be remembered is that using the detailed method for all funds can become very difficult for advisors to manage. When you are using non-balanced funds to implement a client’s portfolio, it usually means that you are planning on doing the portfolio rebalancing yourself at regular intervals. But when you use the detailed method for all funds, the ground is shifting under your feet every month as various managers hold more or less cash or other asset classes in funds that are primarily of a specific asset class.
Let’s consider an example of the problems this can cause. You have a client whose target allocation is as seen here. You rebalance them to this target allocation on January 1st and after 6 months you plan to rebalance the portfolio. In the meantime some managers are currently holding high levels of cash or fixed income in their equity funds temporarily for whatever good reason and when you look at the asset allocation of the portfolio after 6 months, you see a heavy weighting in cash and fixed income and lower than needed weightings in the equity classes. As a result you sell some cash and fixed income, buy more equities and think all is well.
However, the whole purpose of rebalancing the portfolios is to buy low and sell high. Normally you want to sell an asset class that has experienced good growth to lock in profits. However, when your allocation has changed, not due to growth but rather because the underlying asset allocation has changed because of management style, then you are rebalancing for the wrong reason. If you went ahead and rebalanced the portfolio to the target after six months, it’s quite possible that the day after you rebalance, the manager will re-deploy their cash and fixed income into equity investments and now you are overweighed in equities and under weighted in cash and fixed income. This can occur continuously because as an advisor, you have no control over what the manager is doing within the underlying portfolio.
Another problem with the Detailed Method is how difficult it is to get the portfolio balanced in the first place. Within the Web Advisor we have a security selection feature where you can select the specific products you’ll use to achieve the client’s target asset allocation. It is very difficult to actually achieve the target allocation when choosing a single fund results in allocations into potentially all 10-asset classes. And again as mentioned above, a particular fund might be temporarily sitting with an atypical underlying allocation that means once again you will be out of balance as soon as the manager re-deploys to their normal mandate.
While the detailed method of allocation appears desirable at first glance, after careful consideration virtually all of our corporate deployments have agreed that it presents too many management issues for advisors to be viable.
This all being said, at PlanPlus we are a great believer in the Balanced Method of doing asset allocation. You get the best of both worlds with this option. You get to see the true asset allocation of Balanced and Asset Allocation funds which you buy specifically for those weightings and only see the high level summary asset allocation of other funds so that temporary changes in the manager weightings are not causing you to sell and buy at inappropriate times. In our subscription based Web Advisor that’s available to individual advisors, we will be using this Balanced method of asset allocation.
Conclusion
Utilizing a balanced portfolio that is diversified across a variety of asset classes is recognized as the most important factor in prudent investment management. The various features of the Web Advisor give you a great deal of flexibility in developing an investment strategy that is tailored and appropriate for each of your very unique and individual clients. We hope that this information about our approach to Asset Allocation will be helpful.
