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 ?
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.
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.
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.
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.
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.
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.
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.