With increased SEC scrutiny on fiduciary responsibility and doing what’s best for your clients, questions continue to percolate around allocating to third party strategies, in particular the efficiency and timing of trading and steps taken to reduce variability between accounts and investment models.
In today’s fast moving, fluctuating markets, any kind of delay can have various effects on the portfolio’s performance metrics and therefore, the client’s investment return. While technology fees themselves may be in the single digit basis point range, over the course of a year delayed trading can result in performance results that influence a client’s account value by significantly more than the price of the technology. Furthermore, delayed trading can create a significant gap between the stated model performance and the client’s account, as well as differences between client accounts which are all allocated to the same strategy.
The idea that an advisor would make a decision to get out of a position or an investment strategy on Monday, only for their clients to actually be out of it on Wednesday or Thursday needlessly exposes clients to significant market fluctuations. This type of technological stagnation is equivalent to an illiquid position which, on top of an already volatile market situation like what we are experiencing in March 2022, inherently disadvantages clients.
A core element is the speed at which a trade takes place, so advisors should be asking their providers:
- How long from when I make an allocation to when my client’s account is holding the securities?
- How long from when I enter a liquidation/sell notification does my client’s account no longer hold those securities?
- How do you ensure that each client is receiving the same trading treatment?
- How do you assess whether the historical track record I am basing my decisions on is relevant to what happens going forwards with using your technology?
- If a manager makes a change to a model portfolio, how quickly is that represented in my client’s account?
- What steps are taken to reconcile the account?
In short, the modern markets move too fast and are too volatile for anything except modern-day tools. The inability to allocate or liquidate a client’s account for hours, let alone a few days, can significantly detract from a client’s portfolio performance, thereby negatively affecting both the client and the advisor.
Chief Marketing Officer, SMArtX Advisory Solutions