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Hello Folks! I hope you enjoyed reading through last two articles. Essentially we have discussed about asset allocation both strategic & tactical in detail and now I would like to conclude by sharing with you some practical bias, challenges & success I have experienced while practicing this theory over many years.
Personal Bias
This is one of the most common conflict one encounters when practicing asset allocation. For every action, there is an equal and opposite reaction. In the course of doing business we go through a lot of information that comes our way. When we process this information we form views about asset classes, investment options, etc. Naturally at times the view is overwhelming & tilts towards one extreme. For example if we are reading about social unrest, FII selling, deteriorating macro economy, corruption, etc. then our bias towards bearishness would start to grow. The advisor in such times would start reducing exposure in equities. A small down move in equity markets would propel accelerated action at the advisors end. The advisor will call clients and reduce equity exposure across the board notwithstanding the suggested asset allocation. This is essentially to act in the best interest of clients but usually it doesn't work in clients favor. Because the advisor may well be right in forecasting a market correction and he may well be successful in reducing the equity exposure also in time but on the contrary the advisor will never be able to re-invest the money well in time once the correction has taken place. The advisor will grapple continuously with timing the entry on its way back which is further complicated when client also starts using their brains. In fact strategic asset allocation does not warrant any action with respect to market view on a particular asset class still an advisor may tend to react owing to their personal biases. There are various other factors that influence personal bias such as incentives, meeting sales targets, etc. We must resist any such temptations at all times & stick to asset allocation principal only.
Organization Structure
Organizational structure tends to play a deterrent in applying the asset allocation principal across the board. This happens because if the advisor is solo then his bandwidth is choked at times due to many other activities. He may or may not be able to go through each portfolio granular & act in time. On the contrary bigger organization with sales team, research team, etc. fails to implement & practice asset allocation simply due to personal biases. The moment sales pressure increases all discipline takes the back seat. To overcome this challenge an independent monitoring is required also sales targets are to be designed in a fashion that it takes care of the asset class view first & then revenue.
Technology
This is one of the critical elements in implementation & monitoring asset allocation discipline at all times. Since designing the strategy itself requires a lot of number crunching today we have software which can help us do all of it at a click of a button. Using technology we can standardize client response with respect to risk profiling etc. and then we can process the collected information through a pre-set algorithm to design & implement asset allocation strategy for each client. Software can further help us in flagging any deviation in suggested or target asset allocation at a client level or at a household level. This will ensure that the advisor is able to correct any such deviation almost on a real time basis. Technology also helps in arranging the data in a meaningful manner which helps in easy decision making. For example a portfolio spread across multiple mutual fund schemes, stocks, real estate, bonds, PMS, etc. will be difficult to put together in one single statement each time. The process takes a lot of time using MS Excel etc. but now there are software which can help you collate all such information instantly. Once a portfolio is created only few changes needs to be updated and the software will give out a complete report. This helps in saving a lot of time & increases accuracy.
Part Vs Total Portfolio
This is again one of the most common and very important conflicts in asset allocation theory. Clients mostly have more than one advisor who they deal with. At most times they are not transparent in sharing their holdings across multiple advisors. On top of that they have their money invested in alternate investments such as real estate, promoter shares, ESOPs, EPF, PPF, etc. Usually they don't disclose & discuss these investments in their investment discussion with advisors. Neither does an advisor dwell too much into these details. Hence a true asset allocation strategy is difficult to arrive at the first place. Advisor may only be aware of holdings that were invested through him or information that the client has honestly shared with him. He would work on asset allocation basis this information itself and end up doing a great job but still fail to convince clients. For example a client may invest only Rs. 10 out of his size of Rs. 100 through his advisor. The advisor may generate an alpha of 5% on his allocated kitty of Rs. 10 but for the client its only 0.5% on his total portfolio so he may not appreciate at all the first place. I have also observed that clients do not reveal their true risk profile to their advisor at the first place. For instance a client may want me to manage only his equity investments for which he may term himself as very aggressive while he may be a conservative investor at the first place. Usually when the markets do not support such allocation the client simply exits the advisor without appreciating the efforts. So in my opinion an advisor should always ask for client's total portfolio for arriving at asset allocation strategy. The client may choose to give only a portion of his investment to the advisor but that's fine. Having access to overall portfolio will help the advisor in taking more informed decision. As also he will know his scope of growth also at all times.
Cost Benefit
There is no doubt that the benefit of asset allocation theory is immense when implemented religiously in a client portfolio however cost challenges are huge when it comes to implementation of the strategy. For a more pragmatic application one needs to have better software & technology infrastructure. If the number of client account is large then the advisor has to hire competent staff. This apart the advisor himself or herself has to invest a lot of time in following each asset class and then communicating and convincing clients about changes if required on a regular basis. All this attracts a lot of cost for the advisor. As we know very few clients appreciate these efforts and are ready to compensate. Further there are people who are always willing to work for free notwithstanding the quality & consistency part and hence a scrupulous advisor will always be confronted with such conflicts at all times. In my opinion these are differentiators which distinguish a scrupulous, capable & disciplined advisor from the rest of the pool and hence one should stick to the principal of doing what is right for the client rest everything else will follow.
Trust you would have enjoyed reading my article and it will help you in your business. Please feel free to get I touch with me at sachin@mymoneygain.com for any further clarification.
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