Earlier this month, at the National FPA Conference, TD Ameritrade Institutional President, Tom Bradley, presented some fascinating data that I've never seen released by a large investment firm. He showed the aggregate asset allocation of the entire TD Ameritrade Institutional platform. In an interview, Bradley noted their current platform has 4,000 advisors, with $130 billion of clients' money.
- On 10/9/07, after five years of bull markets where US stocks doubled and international stocks tripled, advisors had only 26 percent of assets in cash and fixed income.
- On 3/9/09, at the bottom of the bear market and just before the raging bull started, advisors nearly doubled their allocation to conservative assets at 51 percent.
- Now that financial markets have recovered most of the losses, advisors have reduced conservative assets to 40 percent
TD Ameritrade is one of the three largest independent advisor platforms. These advisors are Registered Investment Advisors (RIAs) with fiduciary responsibility. Nearly all have trading authority and charge as a percentage of assets, so they have no financial incentive to churn their clients' portfolios. Many are Certified Financial Planners. In my opinion, these advisors are among the best in the business.
What the data tells us
Bradley stated to me that the remainder of the portfolio allocation was comprised of riskier assets, namely equities and alternatives. He did not agree with my conclusion that advisors timed the market poorly, and instead noted "the only conclusion that could be reached from this slide is that advisors may have moved to a more conservative portfolio."
It's true that we don't know what drove the changes in asset allocation over time. It's likely that some of the changes were a result of clients calling their advisors and telling them to sell at the bottom of the market. One might speculate that advisors were in close contact with their clients during the market bottom.
It's also likely that a portion of the asset allocation was driven by changes in stock market values. If advisors didn't rebalance, then much of the increase in allocations to cash and fixed income came as a result of the decline in stock prices. That said, the 163% increase in cash still didn't all come from market valuation changes.
We clearly don't know what was going through the minds of these 4,000 advisors, but we can definitely conclude that they did not practice targeting an asset allocation and rebalancing, as most investment policies include. And while we can't state with absolutely certainty what drove the change, we do know that these advisors were heavy in the stock market at the wrong time, followed by very light in the stock market, also at the wrong time.
Advisors now use more options
During both the presentation and in my interview, Bradley noted that advisors are using options more than ever. He stated that, in many cases, it was to provide some downside protection. I asked him why one would use options for downside protection, since options were a zero sum game, and he replied that he wasn't taking a position on which vehicles to use for managing a portfolio's risk. Investment News Magazine, however, states that following Ameritrade's acquisition of the Thinkorswim options-trading platform, they actually do push advisors to use options.
I happen to be a strong believer in managing risk through a high quality bond fund or CDs rather than using options. Options will only increase complexity and costs, but that does seem to be the Wall Street way.
My conclusions and advice
Investment advisors are human, and performance chasing in investing is a human characteristic. That's why sticking to an asset allocation ends up being such a challenge. A fascinating study in The Review of Financial Studies showed that financial professionals tended to performance chase at about the same levels as consumers investing directly. The TD Ameritrade data supports this conclusion on the subset of professionals that are RIAs, and charging on a percentage of assets model.
If you think you are paying a financial planner to provide focus and discipline, you may want to think again. As noted in Dare To Be Dull Investing, a low cost 60% equity and 40% fixed income portfolio, rebalanced annually, would now be above the pre-crash 10/9/07 levels. My advice is that once you pick an asset allocation, stick to it. Remember, if you can't be right, at least be consistent.
Author's note: I am on the TD Ameritrade Advisor platform, though I only custody a small portion of my own assets there and have not traded in years.
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