Some RIAs have Chief Investment Officers (CIOs) and some don’t. In general, it is the larger firms that can afford the expense of in house CIO employees (Salary, bonuses, benefits, taxes, support, stock options). Smaller RIAs have to make a major decision. Act as their own CIO, use the services of an Outsource CIO (OCIO) or use a third party manager, for example a TAMP, SAM, or another type of money management service.
We believe 2022 will be a watershed year for a critical decision that will have a major impact on RIAs and their clients for the rest of this decade and beyond. Let us tell you why.
How credible is your claim to be your own Chief Investment Officer?
Every RIA in America has a website. 95% of those websites have a page titled Our Team that profiles the professionals and administrators who work for the firm.
When there is no marketable Team many advisors revert to a page they call Our Founder and only profile the owner of the firm. The alternative is to leave this page off of the website which becomes conspicuous by its absence. This is a difficult choice for many RIAs – profile a Founder or leave that page off of the website.
The next challenge concerns credentials. Let’s say you are a CFP that owns his or her firm. Your challenge is to convince investors you can wear the planning and investment hats as effectively as firms with specialized professionals. In this case many of these advisors would position themselves as generalists.
On the other hand what if you profiled an OCIO on your website who was a CFA? This frees you up to market a team of specialized professionals versus one or a few professionals who wear several hats.
Will the next 10 years be more volatile than the past 10 years?
2009 to 2021 had some bumps in the road, but in general investors and their financial advisors were rewarded for being in the market. The market more than weathered the Covid crisis and a disruptive 2020 election. The question is will the market deliver the same returns in the 2020’s as it did in the 2010’s?
There are numerous clouds on the horizon that suggest otherwise:
- Political instability
- $30 trillion national debt and rising
- Inflationary pressures
- Disruptions in the supply chain
- Expensive oil and rising
- Historically high stock market
- Rising interest rates
- An election year
How will this impact the performance of your clients’ assets?
When the market is trading at an all time, we do not believe it will not take much to pop the bubble.
Is your firm competitive with bigger RIAs?
What do the bigger RIAs have that you don’t have? The answer could be a lack of internal resources.
During volatile markets you may find that investors gravitate to the bigger firms because they feel safer.
They may believe the bigger firms are bigger for a reason. They have teams of specialized professionals. They may also believe teams produce better results than individuals – the best thinking of the team versus the best thinking of a person. And, there is better succession when there is a team.
Does a part-time investment management role fulfill your fiduciary duty?
If you are an RIA or an IAR then you are a fiduciary who is obligated not to put your interest ahead of your clients’. Is it in your clients’ best interests to have their assets managed by a part time CIO, in particular when the markets are more volatile?
If you put client interests first, then a dedicated CIO may be your best solution.
Will superior risk management benefit your clients in 2022?
You may have already guessed that we strongly believe 2022 – 2025 may be significantly more volatile that what we experienced from 2009 – 2021. Passive management using ETFs came into vogue, during these years, as the most cost effective way to manage your clients’ assets. That worked because it was more important to be in the markets than what you owned in those markets.
We do not believe that will be true for the remainder of this decade. 78 million Baby Boomers are going to be concerned about the performance of their 401k, IRA, and personal assets. And, since they are approaching retirement, are in the risk zone (3-5 years before and after retirement), or are currently retired, they are most likely going to be significantly more risk averse than they were when they were younger and could replace lost earnings with additional savings.
What is your best way to transition your need for money management to an OCIO?
Financial advisors should distinguish between new clients and current clients. Marketing your firm’s investment services are easy if you are presenting them to new clients. By definition, they have no experience with your firm.
Current clients are a different story. You are going to have to transition them to a professional who understands the needs of each client (goals, investment horizon, risk tolerance, liquidity, etc.) and your firm’s need to make this transition as smooth and painless as possible.
We believe this is much simpler when a CIO is a member of your team even if the CIO is an Outsource CIO.
Should financial advisors be acting as their own CIOs?
Let’s say you are a CFP which establishes you as an expert in financial and retirement planning. But, this credential has nothing to do with your expertise for the management of money in the securities and alternative investment markets. And yet, you may represent yourself as an investment expert because you want to control all of part of this revenue stream.
Is your firm better off if you are tied down managing your clients’ assets?
Will active investment management produce superior results in the 20’s?
A large number of RIAs started investing in ETFs using passive investment management strategies in the 2010’s. This worked because just about every type of equity investment went up in value.
But you don’t want to get caught managing money looking at the rear view mirror. As the mutual fund companies like to say, the future may not be like the past. In fact in the mid to late 2020’s it may be dramatically different and this could warrant a very different strategy for managing your clients’ assets.
Is your firm more marketable with an Outsource Chief Investment Officer?
We believe the answer is yes. We believe that your firm is more marketable because it is more competitive with firms your size, has competitive advantage when compared to smaller firms, and is in a better position to compete with bigger firms.
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