All Will Be Revealed: Is your portfolio too complex and expensive?

Posted by Realize Rev on 7/15/16 4:57 PM

In a recent discovery review, we found a new client’s existing investment portfolio allocated among 20 actively managed mutual funds from three well-known fund companies. The average expense ratio of these funds was close to 1.00%, meaning before performance and advisory fees are even taken into account, the client was giving up at least one percent of his assets annually to mutual fund expenses.

By our standards, this portfolio was too complex and too expensive. But why?


Asset allocation, the mix of investments owned by an investor, typically accounts for the majority of a portfolio’s return level. Some advisors make the mistake of believing that client portfolios are more diversified, and in theory less risky, with each additional fund they hold, but where is the strategy? Managing a plan to meet investor goals is even further complicated when clients work with more than one financial advisor. Removing the clutter, we know that you can properly construct a well-diversified portfolio with only four or five complementary investments.

In this client's case, for instance, we found a portfolio with over 20 funds that still had meaningful asset allocation gaps. Despite holding 20 funds, his portfolio was heavily weighted towards large capitalization equities and lacking in small company and fixed income exposure. These types of asset allocation gaps can lead to excess portfolio volatility and ultimately may result in investors not meeting financial goals.

Further, there is overwhelming evidence that the high fees charged by actively managed funds are rarely justified by their performance relative to an appropriate market index. Because we believe that in most cases low-cost index ETFs are most appropriate for our clients, the weighted average expense ratio of the portfolios currently managed by Revolution Partners is generally between 0.10% and 0.20%. Reducing our clients’ portfolio expenses by 50 percent or more is a realistic goal when we begin managing their assets.

Diversification issues like this can be exacerbated by incentives for financial advisors who work for broker-dealers to recommend funds that are perhaps suitable, but not necessarily in their clients’ best interest, because they or their firms are compensated for doing so. Fund companies that participate in “sponsorship” or revenue-sharing programs with broker-dealers are often allowed greater access to their financial advisors and can gain favor through repeated visits and entertainment. For clients, this can result in a portfolio of high-cost mutual funds biased towards a handful of fund companies. 

Could your portfolio could use a thorough deconstruction analysis?

From the onset of the relationship, Revolution Partners encourages our clients to share the details of all of their invested assets, even those assets managed elsewhere. We then provide a complete and detailed analysis of their current investment strategy, using industry data feeds and aggregation software.

We believe that investors are more likely to meet their financial goals when certain factors that can lead to unnecessary loss are comprehensively managed, such as asset allocation, fees, taxes and other implementation costs. Visit us and we’ll show you what we mean by transparency.

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