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Portfolio Allocation Review?

Assuming one is looking at a 25 year horizon, how often is a financial advisor expected to review and change portfolio allocation once it is setup ?

1) How does it differ between 401K vs non-401K portfolios ? 2) Does it change with the mode of advisor compensation ?

Apr 24, 2014 by Ganesha in  |  Flag
7 Answers  |  9 Followers
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5 votes

Hi Ganesha! Your question touches on the variety of advisor models that exist. The answers to your questions could be different for each practitioner. For example, many advisors review your portfolio with you annually, however, the management company may be making changes monthly along the way. Some advisors may take a more tactical view and make changes as warranted by the assets in the portfolio. Also, some advisors do not help with 401k portfolio allocation as they may be paid based on assets under management. The 401k money doesn't count for some, but it may for others. So, the short answer to my long explanation of your question is: it depends.

I focus on financial planning for a simple fee. This allows service to a range of clients not dependent on the value of their assets. I like to meet with clients annually to re-focus not only on asset allocation, but also on life changes that may have occurred. This helps keep your financial life on track.

Hope that helps! Feel free to email me if you have questions.

1 Comment   |  Flag   |  Apr 24, 2014 from River Hills, SC
Ganesha

Thank you Pam.

Flag |  Apr 25, 2014

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5 votes

Other than periodic rebalancing adjustments, portfolio allocation changes should be based on your evolving financial situation and needs, while considering your risk tolerance. This includes your current ability to save, the degree to which you are a disciplined vs. emotional investor, and the number of years you will be retired and the amount of money you will need each year in retirement.

Normally, your advisor should be revisiting these subjects with you every year or two (or possibly more frequently if your circumstances change), to determine whether or not an allocation change is appropriate. Generally, your asset allocation should gradually become more conservative over time as you approach and enter retirement, but each person's needs, circumstances and risk-tolerance is different.

The same concepts apply to 401k accounts... however, different 401k plans can have very different investment structures. Some have "target date funds" which automatically adjust the allocation for you, whereas other structures require that you make the allocation changes yourself.

Advisor compensation is not related to your allocation needs. However, advisor compensation is often related to their business model, which can an indication of the type of service you will receive. Unfortunately, the asset and fee size you have may also affect the level of attention you receive from some firms.

Lastly, be clear that a 25-year time horizon to a retirement start date means that your overall time horizon is actually much longer, probably closer to 50 years, so it is important not to be excessively conservative with investments too soon... because it will increase other types of risk, such as running out of money before you run out of years.

View all 4 Comments   |  Flag   |  May 02, 2014 from San Francisco, CA
Gregory H. Patterson

And regarding your more recent question, is sounds like you are referring to what some people are projecting to be the "new normal." No one can predict the degree to which returns will be dampened or volatility increases with a high degree of accuracy, but any change in expected returns and volatility can impact one's own personal plan... regarding appropriate saving, spending and how assets should be invested. For example, if one increases the expected return of a portfolio by increasing stock exposure, that also increases volatility. So, again, this ties back to the delicate balance between needs vs. risk tolerance, among other factors.

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Flag |  May 06, 2014 near San Francisco, CA
Ganesha

Thanks Greg.

Flag |  May 06, 2014

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4 votes

I think that paying close attention to portfolio changes made by the portfolio manager is important and so you need to have at least one review annually, but depending on market conditons and events do not feel antsy to do it more especially if it will allay any concerns. Also do not depend exclusively on Morningstar as a be all and end all factor because if you own a mutual fund and most investors do you have to make sure a fund with say a 5 star ranking has the same portfolio manager that amassed those gains. Sometimes when a fund changes managers the fund's performance suffers. When you own a diversifyied portfolio and the fund managers performance over many cycles is above average that can allow room for patience during down markets or if he/she is going through a rough patch. I help clients with a multifaced approach that includes financial planning covering Retirement, Protection, Education and Asset allocation strategy... I believe if you carefully have those areas covered you will increase your chances of reaching your goals.

1 Comment   |  Flag   |  Apr 24, 2014 from Whiting, IN
Ganesha

Thank you Frederick for the suggestions.

Flag |  Apr 25, 2014

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4 votes

A good financial advisor should be monitoring their clients accounts on a daily basis, utilizing technology to do this best. A review should occur anytime that something becomes out of balance. The time horizon isn't as important to me, that more dictates the allocation and risk. Unfortunately, many "advisors" only review when they want to make a transaction commission. If you aren't already, find an advisor that is fee-only or at least just charges as a percentage of assets, not transactional/commission.

3 Comments   |  Flag   |  May 05, 2014 from King of Prussia, PA
Ganesha

Thank you for the suggestion regarding transactional-commission vs others. Could you please clarify your comment regarding "monitoring on a daily basis utilizing technology" ... most advisors seem to want to do it on a/an (semi)annual basis.

Flag |  May 05, 2014
Nicholas Olesen, CFP®, CPWA®

Ganesha, great follow-up questions. Yes, most advisors will say they will meet semi-annually to review but I have found that during the "non-meeting" times, many aren't paying attention to your portfolio. Investors should ask their advisor to show how they monitor what is happening during the "non-meeting" times. We use an online collaboration system that allows us to constantly make sure our clients portfolios are allocated properly. When something isn't correct, WE call our clients. We don't wait for them to call us. I would ask to speak with a few current clients of any advisor you are interviewing and ask how often the advisor calls them. If it's only a few times a year, find someone who is more proactive.

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Flag |  May 05, 2014 near King of Prussia, PA
Ganesha

Thank you for the pointers.

Flag |  May 06, 2014

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4 votes

Rebalancing your portfolio should take place about once or twice a year, according to a study by Vanguard Center for Investment Counseling and Research (Vanguard July 2010), with the asset allocation threshold at about 5%. In other words, if your equity or bond holdings moves by more than 5% within a year, you may want to rebalance. More frequent rebalancing may be counter-productive.

3 Comments   |  Flag   |  May 05, 2014 from Newport Beach, CA
Ganesha

Thank you Keith for the pointer to the Vanguard study. Would you hold the same view assuming a volatile markets over extended periods of time ?

Flag |  May 05, 2014
Keith Bong, CFA, CPA

Thanks for the question, Ganesha. I would say yes. You need to stay the course if you're investing for the long term.

Flag |  May 06, 2014 near Newport Beach, CA
Ganesha

Thank you Keith.

Flag |  May 06, 2014

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1 vote

Ganesha: to me, rebalancing is more a function of market movements than a function of time. In volatile markets, reviewing an allocation strategy only once per year may not be frequently enough. When markets are more stable, it might not be necessary to rebalance even once per year. The key is to work with an advisor to develop an asset allocation that fits your financial situation, time horizon and risk tolerance, and to set review triggers that you are comfortable with (a 5% change from allocation target, for example).

Another issue to consider is portfolio visibility. If you have investments spread among several accounts, including company 401(k), personal IRA and taxable accounts, it's very helpful to have one consolidated view of all of those accounts. My firm uses an internet-based account aggregation and reporting tool that allows my clients to see ALL of their financial investments in one place, even if they are held at multiple different custodians. This makes the portfolio review and rebalancing exercise much easier, and provides a real-time view of the client's complete financial picture.

Comment   |  Flag   |  May 19, 2014 from Columbus, OH

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Rebalancing more than once a year may cause very poor income tax results. Mutual funds can also cause tax problems. Consider using managed ETFs that continually rotate holdings within the fund instead of just selling funds. See FWDD, FWDI and FWDB.

View all 9 Comments   |  Flag   |  May 07, 2014 from Everett, WA
Gregory H. Patterson

Tax efficiency is very important (that is, where it is relevant). However, tax efficiency shouldn't be the tail that wags the risk/allocation/rebalancing dog, however it can be a consideration, within reason. ETF's aren't necessarily tax efficient... it depends whether or not the ETF has low or high turnover. Many ETF's happen to be passive/indexing, which generally equates to low turnover. However some ETF's are active/high-turnonver. And index and other low-turnover mutual funds can be equally or more tax-efficient than ETF's... it is very case by case. Hopefully readers this sequence/subject will get the sense about the importance and degree to which sophisticated and sensible application of an investment process matters (and that is an emphasis on process, not "product") is important, and there are nuances that depend on the client, situation, taxable vs. non-taxable assets, etc.

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Flag |  May 07, 2014 near San Francisco, CA
Gregory H. Patterson

I should add that where it makes sense, and where investors have sufficient assets, the incorporation of tax-aware separate account managers can be helpful as well. That is particularly helpful for people who have existing portfolios of individual securities with low tax basis and need a custom approach to gradually winding out of an under-diversified portfolio and into a portfolio and overall portfolio that is more appropriate. However, as always, it depends on the situation... some mutual funds have proven over time to be more tax efficient than such separate account managers (for an array of reasons that involve more detail), and it also depends on the level of volatility in the market at the time... separate account tax-aware managers often harvest more tax losses in periods of higher volatility relative to commingled vehicles.

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Flag |  May 07, 2014 near San Francisco, CA

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