Kevin Kern
by Kevin Kern

Founding Partner

Key Points

  1. Most investment options provided by financial institutions are inefficient and made for one size fits all.
  2. True portfolio customization needs to take into consideration client restrictions, existing holdings and tax considerations.
  3. Advisors Capital Management builds portfolios with individual securities at the clients’ own cost basis and the ability to manage realized gains.
  4. Income distributions can be built specifically for each client’s monthly expenses reducing the need to use portfolio principal for income.
  5. Concentrated stock positions can be managed with option writing for allocation reduction.

Caution: Financial institutions often use the word customized to describe investment portfolio design. Actually, most institutional portfolios are anything but custom or unique to you and could be harmful to achieving your financial goals.  Even the most thoughtful financial plans can be rendered ineffective by dumbed down and dangerously restrictive investment portfolios.  This is because while good financial plans are very personal, the investment solutions created by many institutions are not.

Why is this the case? Most institutional portfolios are prepacked silos that for reasons of cost, compliance, marketing and trading efficiency cannot be deviated from.  Institutions build these portfolios based on rigid guidelines of comparable benchmarks, risk, capitalization just to name a few.  What is missing from these guidelines is your specific marching orders.  With portfolio personalization a pipedream, investors and advisors are left mixing and matching premade index-chasing models in an effort to diversify or achieve financial plan requirements.

Pooled investment inefficiencies

Mutual Funds and Exchange Traded Funds (ETFs) are managed as pools of money with many participants enjoying the ease of entry.  Investors in these pools do not own the actual individual securities in their own name and cost basis, but rather have a share of the pool.  Many of these types of portfolios are also closet indexing predetermined market indexes.  Index driven portfolios do not take into account an investor’s desired income distributions, portfolio diversification or personal risk level. As investment firms try to build single investment solutions for many, they create a number of conflicts of which can include tax inefficiencies and liquidation risk to name a few.

There is more customization at Macys. 

A clothing retailer would not ask a customer looking for a 42 long blazer to squeeze into a 38 short. The financial equivalent would be investing in a pre-packaged portfolio that will not take into account existing holdings, desired income or restrictions on cash, companies or industries.

Why not properly fit the client for their personal needs? 

At Advisors Capital we offer clients the opportunity to graduate from pooled investments such as mutual funds and ETFs to a personalized and properly fitted portfolio which can help avoid the financial industry’s cookie cutter approach.

Here are 5 reasons why an ACM private account is the better choice for investors looking for a truly customized investment fit.

  1. Tax efficiency.

Pooled investments such as mutual funds and ETFs do not allow investors to control their realized gains or losses.  Investors can incur realized gains from holdings made prior to their arrival.  And have capital gains surprises year over year. This lack of tax efficiency can reduce the overall performance of the portfolio and an investor’s financial plan.

  1. Owning individual securities

ACM private accounts are designed so that investors own individual securities at their cost basis which allows for better tax and risk management. Having the freedom to decide when and what to sell can increase long-term performance.  For example, bond funds are managed by prospectus for a specific type of bond, credit quality and duration.  These portfolio directives usually remain consistent while the financial world around them changes.  Should an investor find themselves in the wrong bond fund or ETF in a rising rate environment they could be left holding the bag as others leave the pool and force the manager to sell for liquidity needs.  On the contrary, ACM private account clients own their own bonds and can hold them to maturity, mitigating liquidation risk associated with mutual funds and ETFs.

  1. Knowing what you own.

Institutions need a score card or benchmark to compare portfolio risks and objectives.  Market indexes are used for these portfolio measurements.  Domestic stock growth investors might compare to the S&P 500 index for example.  At best indexes should be used to see how the underlining securities in them are performing at any given time.  But people don’t retire on indexes.  They retire on specific goals that the portfolio needs to provide over time.  An ACM private account is “built to order” blending the client’s specific needs with the securities for that task.

  1. Personal distribution methods.

Institutional portfolios will sell across all securities in the portfolio when there is a distribution request without any consideration toward which securities should be sold or trimmed.  A wiser choice would be to create a portfolio that will provide the monthly distribution needs solely from the income generated by dividends and interest so that the investor is not selling shares and potentially cannibalizing their principal. In an ACM private account should the client need to sell additional principal for a distribution, there is a discussion and review to choose which holdings should be sold smartly.

  1. Owning existing holdings and personal restrictions

Why should investors be forced to deconstruct their portfolios only to once again be reconstructed by institutional portfolio managers? Having to start with cash to begin investing can be costly and disruptive.  A client’s legacy holdings are rarely considered.  ACM’s private accounts are able to restrict the sale or purchase of existing and future holdings, industries or sectors.  This is more than just a personal preference; it is an essential part of properly diversifying each investor.

Advisors Capital builds private accounts after a discussion with you, based on what you currently own and designed around a personal financial plan.  Each private portfolio can take into consideration existing holdings, concentrated stock positions, client restrictions, personalize stock, bond and cash allocations.  For income investors our private accounts can target specific monthly distribution needs based on portfolio income and financial plan requirements.  Minimum account size is $500,000.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.