Portfolio Construction vs. Investment Planning

February 18, 2016

Portfolio Construction vs. Investment Planning
By Corey Keltner, Practice Development Specialist

Portfolio Construction vs Investment Planning
Most advisors consider the investment process the core of their business. This is generally how you get paid and therefore where you focus your time. Lately though, we have been seeing a shift toward the commoditization of investment management. Asset allocation, diversification and rebalancing can be easily outsourced to professional money managers who have the time to keep up with changes in the markets all day and make adjustments quickly. I am seeing more advisors make the decision to outsource investment management but many advisors are still wondering, “If I am not managing the assets, where is my value to the client?” I think this is a good time to distinguish the easily outsourced task of portfolio construction with the high value task of investment planning.

Why not Portfolio Construction?
Building portfolios with mutual funds and ETFs generally involves a significant amount of time when done properly. You spend time building the bones of your portfolios, the asset allocation, by researching the economy, global factors, interest rates, valuations and a host of other potential data based on your personal biases and interpretations. Once you have your basic risk and tax based allocations, you must then move to filling in those buckets with the investments. This involves researching and discovering which fund, stock, ETF, etc. has the criteria that you want. This is often a qualitative and quantitative mix of items such as past returns, risk/return ratios and perceived manager quality. When the portfolios are complete and backtested, you then must make ongoing decisions on when to rebalance, when to fire a manager and when to tweak the portfolios once the client money is invested. This can be an exhaustive process and often is a full time job in larger practices.

Why Investment Planning?
Investment planning focuses on the areas where you and your clients have some control. While we cannot reliably predict the next market correction or when interest rates will rise, there are quite a few things that your client can control.

  • Savings and Spending – This is the most obvious area where a client can affect change. Sometimes adding just a little extra every month into the retirement plan can make a big difference over time.
  • Portfolio Risk – The best laid retirement plan can easily be ruined when a client opts to sell at the bottom of the market. Gauging both the client’s ability to handle volatility and how much risk they need to get sufficient returns requires more than a risk tolerance questionnaire. The best advisors really understand the client’s background and overall relationship with money. This helps them guide clients in a positive direction.
  • Distributions – This is a big area of investment planning. Sequence of returns in a distribution portfolio can get very complex. If your client experiences a bear market in the early years of retirement, it can negatively affect the rest of their retirement. Understanding this concept and developing a strategy that the client understands can make all of the difference.
  • Tax-Efficient Strategies – Saving and distributing income in a tax efficient way can keep clients from paying unnecessary taxes. While we never know what the future holds for taxes, solid planning in this area can help your clients maneuver around our onerous tax system more effectively.
  • Roth Conversions – Converting to a Roth has a number of potential benefits such as the ability to pass on assets to heirs without the need for mandatory distributions. Roth conversions can also be a good idea when the portfolio has dropped substantially and you want to minimize taxes on the conversion.

Fortunately, you have a number of good options when it comes to outsourcing your assets or minimizing the time spent if you choose to manage the assets yourself. Encompass is our fastest growing advisory program specifically because of the ability to build and execute against risk models or completely outsource to investment managers such as Ladenburg or Morningstar. We believe that the advisor of the future will need to either have scale and an in-house trader or need to get very efficient in order to provide clients with the level of service that they now demand. If you do not have the scale, consider efficiency as your best hope in moving your business forward.


Please email Corey Keltner if you have any questions at

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