09.18.20

The benefits of managed accounts during uncertain times

Financial well-being is a fundamental goal. It's about protecting what means the
most to you and your family, from your income and assets, to your lifestyle—now
and in retirement. However, achieving this goal requires far more than simply
saving or investing money. That’s because the quality of the returns your portfolio
generates can make the difference between reaching your goals and falling short.
 
“Helping people plan for a lifetime of financial security is what we were built
for,” said TIAA Wealth Management Director, Jim Daniello, CFP®. “From top
to bottom, our approach to managing wealth is structured to ensure the right
tools, resources and disciplines are in place to help manage risk in any market
environment.”
 
That can be especially important during periods of change and uncertainty, when
managing your investments requires even more time and expertise.
 
“That’s where engaging professionals who are working on your behalf every day can really make a difference,” Daniello said. “For example, over the course of the 11-year bull market, many investors weren’t aware that they may have inadvertently taken on more risk than they can handle. In many instances, the amount of risk their portfolios were exposed to was not aligned with their risk tolerance, which became evident once the extreme volatility hit in March of this year.”
 
Daniello says this had an emotional impact on many investors as well, causing them to move to cash at the wrong time. He believes this is, among many reasons, why investors with significant wealth can benefit from professional portfolio management.
 
“There's basically two paths investors can take,” he said. “You can go the self-directed path, or you can go the professionally managed path.”

The case for professional portfolio management

John Canally, a CFA charterholder and a TIAA chief portfolio strategist, believes that a well-thought-out long-term strategy is essential to helping investors stay the course through the market’s ups and downs.
 
“The reality is most of us are not emotionally equipped to make the tough calls during times of significant volatility,” he said. “That's where an objective process utilizing teams trained to do the right thing under difficult circumstances can really make a difference. For example, when the markets were down 34% in March, portfolio managers were buying equities for those accounts that needed
to be repositioned to align with the client’s stated risk tolerance. It’s very hard to do that with your own money. It’s also difficult to sell positions that are down significantly, even though that may be the right thing to do for tax purposes.”

The value of a disciplined approach

“We know that a disciplined approach to managing investment assets, based on sophisticated centralized analysis, research and experience, can help keep your portfolio on track toward your goals while keeping risk in check,” Daniello said.
 
However, he concedes it can be complicated for most investors to master all of the moving parts on their own. These include strategic asset allocation, fund selection and manager pairing, consistent portfolio monitoring and oversight, and smart rebalancing.
In addition, executing on a disciplined investment approach requires a number of core capabilities and resources that many self-directed investors may not have access to or the time to implement. These include:
 
  • Financial markets research
  • Asset allocation and quantitative research
  • Manager research and due diligence
  • Model portfolio construction
  • Multi-asset, fixed income and equity portfolio management expertise
  • Tax overlay management
  • Trading support
  • Performance attribution and reporting
 
The fund selection process alone can be overwhelming for many investors. Do you have a process in place to pick the right asset classes and managers? Do you prefer an active or passive approach? For example, active portfolio management focuses on outperforming the market in comparison to a specific benchmark such as the S&P 500 Index, while passive portfolio management mirrors the investment holdings of a particular index in order to achieve similar results.
 
“If your approach is to buy the index, you’re still looking at a universe of over 2,000 mutual funds to start with,” Canally said. “If you simply choose the one with the lowest fees, it may not be the best choice for meeting your objectives.”
 
Even if you have access to all of the tools and resources, are able to spend upwards of $20,000 a year for the right data sets and have all the time in the world, Canally cautions that it's still very hard to do.
 
“In a managed account, everything from fund selection to tax-loss harvesting and rebalancing is done for you by experienced professionals with broad access to the information and resources necessary to conduct due diligence across asset classes, managers and individual investments,” he said.
For those taking income in retirement, managing your own portfolio can be even more daunting. According to Canally, the additional burden of managing a tax-efficient withdrawal strategy can be really hard to accomplish on your own—not to mention time-consuming. That’s because there are essentially nine steps that must be repeated in sequential order on an ongoing basis—and not just for a few months.
 
“You’re looking at repeating these same steps on a monthly basis for 10, 15 or 30 years in retirement if you choose the self-directed path,” he said.

9 essential decisions

Each month, investors taking income from their portfolios must determine:
 
  1. What to sell
  2. When to sell it
  3. Which account(s)/type(s) of asset to sell
  4. How to technically execute the sale
  5. The tax liability of the sale
  6. How to facilitate the movement of the raised cash from an investment account to a checking account
  7. How to facilitate the movement of the cash to pay for expenses
  8. How to effectively rebalance the portfolio once these steps are completed
  9. How to repeat this process in 28 days
 
“Remember, when you're taking income, it’s really critical that you’re taking it from the right places at the right time. You can't just take all of it from the same asset classes,” Canally said. “Then, after you take income, you need to rebalance again. In a managed account, all of these steps are automated for you.”
 
According to Canally, it’s also critical to have a plan in place for preserving principal and managing inflation and market volatility. These are components of managing risk, along with understanding when to buy and sell investment holdings. As such, you need a disciplined and repeatable investment policy that addresses:
 
  1. Tax efficiency
  2. Income and yield
  3. Risk management
  4. The ability to keep emotions in check
 
“Back in March, the smart thing to do was to buy securities that had fallen in price and sell holdings that had risen in value,” he said. “However, many investors did the opposite. This is where ongoing oversight and professional advice can really pay off.”
 
According to Canally, we experience a significant market disruption about every 10 years. That means that over a 30-year period in retirement, it’s likely for an investor to experience at least three of them. In the meantime, if you’re not
following a disciplined, unemotional and repeatable process to harvest gains, and manage inflation and market volatility on a consistent basis, you could find yourself drifting further and further away from your goals, and scrambling to make the right decisions when the next downturn comes.
 
That makes the ability to view your investments in the context of your comprehensive financial plan even more important.

A team dedicated to your success

“Managed accounts aren’t simply about freeing up time to spend on life goals that are important to you in retirement,” Daniello said. “It’s about expanding your team. In a managed account, each decision is tied to a specific purpose
aligned with your individual goals. That’s really hard to achieve on your own on a consistent basis.”
 
That level of coordination and synergy across the different aspects of your planning and your investment portfolio creates the foundation for determining if you’re still on track toward accomplishing your goals or if adjustments need
to be made. Daniello believes this is particularly important during periods of uncertainty.
 
According to Daniello, if you’re considering whether a self-directed or managed accounts path is right for you, you should take time to explore how a personalized approach, designed to help you feel confident that your portfolio is aligned with your goals and investment style, can help you:
 
  • Pursue a lifetime of financial well-being
  • Create a portfolio designed around what matters most to you
  • Remain on track toward your goals through a disciplined investment approach
 
To learn more about how professional portfolio management can help you overcome obstacles along the path toward your goals, schedule time to talk to a TIAA advisor today.

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This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
 
Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.
 
TIAA managed account services provide discretionary investment management services for a fee. Investing involves risk and the value of your investments may gain or lose value and fluctuate over time.
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