What RIAs are Risking by Self-Managing Client Portfolios
As a Registered Investment Advisor (RIA), providing investment management of client portfolios is a critical component of your value proposition. However, handling your own portfolios comes with both benefits and challenges. While some RIAs may prefer the control and autonomy of managing investments in-house, there are significant drawbacks to consider. In this article, we explore the downsides of an RIA managing their own portfolios and why outsourcing may be a viable alternative.
Managing portfolios involves significant time and effort. Conducting research, monitoring market trends, analyzing individual securities, and executing trades require substantial resources. For most RIAs today, those resources can be better spent on activities more aligned to their core value propositions. For advisors focused on holistic financial planning, this includes building client relationships, delivering comprehensive wealth management services, and ultimately growing their business.
Even seasoned financial advisors may lack the specialized expertise required to make optimal investment decisions consistently. Managing portfolios necessitates staying abreast of market developments, macroeconomic trends, and industry-specific factors. Without a dedicated team of investment analysts, your ability to access timely, accurate, and comprehensive information may be limited. External investment managers often have dedicated teams and sophisticated strategies to achieve more consistent and diversified returns. For example, the alternative investment space presents a lot of opportunities for high-net-worth clients, and advisors who serve them. However, their inherent complexities make them difficult to implement at scale. To implement alternatives successfully many RIAs leverage the expertise of a third-party.
As human beings, financial advisors are not immune to emotions, including fear and greed. Emotions can influence investment decisions and lead to behavioral biases, potentially harming clients’ portfolios. Outsourcing portfolio management to experts can provide a more disciplined and unemotional approach to investing, which is crucial for long-term success.
Compliance and Regulation:
Managing your own portfolios adds another layer of regulatory burden and compliance responsibilities. Staying compliant with ever-changing rules and regulations can be time-consuming and complex.
Technology and Infrastructure Costs:
Efficient portfolio management requires robust technology infrastructure, including trading platforms, research tools, and risk management systems. Maintaining and upgrading these technologies can be expensive for smaller RIAs, diverting resources from other critical aspects of your practice.
Lack of Diversification:
RIAs may have limited resources to access a wide range of investment opportunities, leading to concentrated portfolios. A lack of diversification can expose clients to higher levels of risk and reduce potential returns.
Time spent on managing portfolios in-house comes at an opportunity cost. By outsourcing this function to specialized investment managers, you can allocate more time to growing your business, nurturing client relationships, and expanding your service offerings.
While managing your own portfolios may provide a sense of control and customization, the downsides must be carefully considered. As an RIA, your primary focus should be on delivering comprehensive financial planning and wealth management services to your clients. By outsourcing portfolio management to skilled and experienced professionals, you can provide your clients with the expertise and resources necessary for achieving their financial goals while positioning your firm for growth and success in the long run.
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IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content that we find relevant and interesting to clients of Fountainhead. All shared thought represents our opinions and is based on sources we believe to be reliable at the time of publication. This article utilizes artificial intelligence (AI) technology to enhance the content and provide additional insights. While we continue to make these reports available, we do not update past reports in light of subsequent events. Nothing in this letter should be construed as investment advice; we provide advice on an individualized basis only after understanding your own circumstances and needs.