Portfolio Management for Financial Advisors


But financial advisors don't do portfolio management, that is the response I got from some colleagues whenever I spoke about writing a book on portfolio management for financial advisors. Arguably, one area where active portfolio management is a necessity, is in the field of financial planning. Surely, the goal of the advisor is not to beat the market, but to help clients reach their financial goals. However, financial goals are archived through financial products and in all cases, investment products such as stocks, bonds, and mostly unit trusts/mutual funds among other products such as insurance, are used.


Financial advisors perform investment needs analysis and develop investment plans which are documented in investment policy statements (IPS) and executed through the creation of portfolios that are in line with clients' risk profiles. These portfolios are continuously monitored and re-balanced periodically to keep them in line with clients' objectives. When objectives change, portfolios are adjusted to reflect the new objectives. In times of severe market stress, risk profile of clients may change. An objective evaluation of a client's risk profile may suggest a need to buy more equities since prices are depressed (buy low), in most cases, the advisor may have to coach the client to stay calm and prevent panic and selling out of the market. The are also those unfortunate situations when the advisor may have to sell some equities from the client's portfolio. Whichever way, the advisor is an active manager of the client's portfolio.


According to Lynn Hopewell, the former editor of the Financial Planning Journal:

"... financial planning is becoming dominated by asset management services [wealth management], a question must be raised as to whence cometh asset-management education for financial planners ... As asset management becomes more dominant in our business, asset-management education must like-wise follow … we need some concentrated offerings that focus on just this subject"


Financial planning/wealth management is made up of eight main components and among these components is investment/portfolio management.



In the October 1995 issue of the Financial Planning Journal, Lynn went even further to argue:


I will go even further – if you don’t thoroughly understand the material in Padgette’e article [a technical article on performance reporting], you may call yourself a financial planner, but you cannot call yourself an asset manager or investment professional. The essence of asset management is investment policy, portfolio design, and performance measurement. The technical tools are modern portfolio theory and statistics. If you don’t master this material, you are like someone who claims to be a physician but who doesn’t know about the body’s circulatory or immune systems. We need not call that person a physician; we would call him a “quack”


In my latest book Portfolio Management for Financial Advisors, I try to address to concerns raised by Lynn by providing a concise discussion on portfolio management from the advisor's perspective. Chapter One presents an overview of the asset management industry and covers the recent developments in the industry. Financial advice alone is not enough to change maladaptive behaviours, the inability of financial advisors to identify emotional blocks that keep clients in destructive financial behaviours is one of the main reasons financial plans fail. In Chapter Two - Money Doctors - I present a case of the financial advisor as a therapist and discuss how the advisor can take on the role of a therapist to better serve clients. Chapter Three cover the fundamental elements of Modern Portfolio theory, while Chapter Four deals with behavioural finance. In Chapter Five, I discuss the portfolio management process and cover portfolio rebalancing strategies and the different approaches to rebalancing portfolios. Chapter Six covers the different methods of measuring investment perfomance and issues relating to these methodologies. The Chapter also delves into robo-advisory and discusses the technologies behind robo-advisory systems and the portfolio management techniques used by these systems. The chapter concludes with a discussion on how financial advisors can leverage robo-advisors to enhance their practices.


Vanguard's Cynthia Pagliaro and Stephen Utkus in their report, Assessing the Value of Advice, argue that emotional outcomes account for 45 per cent of the total perceived value of advice, while 55 per cent of value is related to the functional elements of the advisory relationship, such as portfolio management, financial planning, and other services. This book aims to equip financial advisors with the theoretical and practical knowledge to efficiently and effectively deliver on their portfolio management mandate. I strongly believe that this book will be beneficial to both practitioners and students in the field of financial planning and will contribute to the literature in our field.

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