FINANCIAL PLANNING SERVICES
The Advantages of Individual Equity Portfolios BY STEPHEN GALLI, CFP®, NISIVOCCIA WEALTH ADVISORS
Many independent financial advisory firms do not offer their clients individual equity (IE) portfolios. Or, if they do, they often outsource IE portfolio management and sacrifice much of their fee. This is mainly because the perceived effort and complexity to create and manage IE portfolios in-house is intimidating. Common misgivings include the difficulty of researching stocks, the fear of picking poorly performing stocks and the extra work behind managing customized (versus model) portfolios. This creates compelling opportunities for differentiation among advisors that do offer their clients IE portfolio options. REASONS TO EXPAND Here are five top reasons for firms to expand their portfolio offerings beyond just ETFs and mutual funds: 1. Tax alpha. For firms that are affiliated and/or partnered with tax and accounting professionals, IE portfolios provide the ability to generate tax alpha. Unlike with funds or ETFs, using IE portfolios allows the advisor to be in control of capital gain/loss generation. The ability to selectively time and harvest gain/losses can give IE portfolios a tax advantage over fund/ ETF portfolios. 2. Customized portfolios. Environmental/social/corporate governance (ESG) investing is a trend that is here to stay. If a client wishes to avoid exposure to certain companies, that’s almost impossible to do when just using funds/ETFs. Advisors who can emphasize alternative energy or avoid tobacco products in portfolios will differentiate themselves and achieve deeper relationships with the increasing number of clients that are ESG sensitive. Another advantage of customized portfolios is the ability to be more creative in regard to dividend income generation.
3. Assets under management (AUM) growth and client acquisition. Independent advisory firms are steadily gaining market share from their larger competition (usually global banks/ investment banks). Quite often, competitor portfolios from large wealth management firms utilize individual equities. If clients are used to owning individual stocks, it is more difficult to attract them unless you also offer IE portfolios. 4. Reverse fee compression. Many advisors are feeling some type of fee compression pressure. As the industry continues to consolidate and get more competitive, larger-scale players can ultimately offer more for less. Advisors who are able to offer IE portfolios and manage them in house will not only instantly see their net fees increase, but can more easily justify existing fee levels because they are providing a more complicated and differentiated product. 5. Better performance. It is important to note that clients who use IE portfolios can enjoy performance advantages over more traditional fund/ETF portfolios. Unlike funds and ETFs which carry underlying fees generally ranging from 5 to 150bps, individual equities carry no additional underlying management fees. ADDRESSING COMMON CONCERNS The following are some common objections and misconceptions advisors have about expanding into IE portfolios: y Discomfort with idiosyncratic risk. This is an unjustified fear as long as the advisor avoids using too few individual stocks in a client portfolio. Portfolio management theory basically states that if a person owns about 20 stocks, they have achieved maximum diversification benefit and can almost eliminate unsystematic risk.
y Unfamiliar with picking stocks. While many advisors hold a CPA, CFP® or other similar designation, very few are a Chartered Financial Analyst (CFA®). Fortunately, there are many excellent, reasonably priced vendors that advisors can leverage. Additionally, many sales representatives from large asset managers are eager to help advisors analyze and manage IE portfolios, and they also often provide both simple and powerful online analysis tools. y Difficulty with tracking and trading. Many back-office technology platforms are getting more sophisticated, helping advisors efficiently manage and trade IE portfolios. IE portfolios are a great way to separate your practice from the competition. I recall meeting an investor in his 60s who told his former advisor to buy transportation and logistics company Federal Express (FDX). The adviser replied, “I’m sorry, but buying individual stock just isn’t something that we do.” Suffice it to say, he’s now my satisfied client. Stephen Galli, CFP®, is a financial advisor at Nisivoccia Wealth Advisors, a wealth management firm with over $750 million in assets under management. He can be reached at sgalli@ nisivocciawealth.com.
NEW JERSEY CPA | SUMMER 2021
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