Mark Meredith, CFP®

Financial advisors are often encouraged to outsource the portfolio management portion of their business in order to scale their practices. This is not always a bad thing, as some advisors tend to be more focused on budgeting, estate planning, insurance etc. they do not have the time or desire to engage in investment research.

Today, many portfolios are allocated towards mutual funds and ETFs which have their own internal expense ratios, which are on top of the fee the advisor is charging. Outsourcing portfolio management adds another layer of costs which must be passed on to the client (Meredith Wealth Planning does not outsource portfolio management).

At my past employer we were encouraged (but not forced) to outsource portfolio management to “model portfolios” that were managed in house by the brokerage firm. The advisor could choose from many different portfolios that were designed according to different risk tolerances. However, the advisor could not dictate any of the holdings inside the portfolio and gave up control on when investments were bought or sold.

It didn’t take me long to realize I was not a fan of this outsourcing. I was comfortable explaining and defending investment decisions that I had thought through from my own reading, but explaining the decisions of others when I had no good answer was quite uncomfortable. Brokerage firms have an annoying tendency to make portfolios complicated, while adding no additional value from the complexity. I’ll go into detail with some examples.

One of the in house models had a 50/50 allocation of their US Large Cap segment to the Ishares Russell 1000 Growth ETF (IWF) and the Ishares Russell 1000 Value ETF (IWD). You may think it makes sense to own allocations to both growth and value in the large cap space, and you can by simply owning the Russell 1000 ETF (IWB). So is there any additional benefit to owning both IWF and IWD over just a 100% holding to IWB? It does not appear so.

50% IWF/50% IWD Rebalanced Annually100% IWB01/01/2001 – 10/31/2019

Annualized Return


From a return standpoint you would have been better just owning IWB, and eliminated some useless overkill in your portfolio. The risk was also about the same.

On to the next position, we also owned a unique ETF in the outsourced balanced model called the “IQ Hedge Multi-Strategy Tracker” (QAI). Now, I am not writing this to degrade that particular investment (although it does carry a very high expense ratio for an ETF of 0.80% annually, has fairly significant correlation with the US stock market while it is supposed to be an uncorrelated asset, has underperformed both stocks and bonds since its inception in 2009, and offered no identifiable diversification benefit. Other than that I’m sure it’s great).

My objection to this holding was that it accounted for just a 3% of the weight of the balanced portfolio. I remember calling the asset management division of the firm stating that a 3% allocation to any ETF is not going to move the risk or reward needle at all. They disagreed with me stating that it’s an “uncorrelated asset” that will provide a long-term benefit to the portfolio. Let’s see how a 3% allocation would have complimented a balanced portfolio since its inception in 2009…..

To keep this real simple, we will use the Vanguard Balanced Index (VBINX) as portfolio 1. Portfolio 2 will be split 97% into the Vanguard Balanced Index and 3% into QAI.

100% VBINX97% VBINX/3% QAI Rebalanced Annually04/01/2009 – 09/30/2019

Annualized Return


Not only did portfolio 2 do worse, but more remarkably it did worse in every single calendar year (even in 2018 when the market lost money).

Many investment firms feel the necessity to keep things overly complex to justify charging more. The reality is that far more value can be added in getting investors to stick with a simple investment plan than making them feel lost with a complex one.

If you enjoyed this article you may also enjoy a similar post from my friend at Movement Capital: Making Money Vs. Sounding Smart

This article is for informational purposes only and is not a recommendation of Meredith Wealth Planning or Mark Meredith, CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the Article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the Article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

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