For those who find themselves with less and less time to oversee their investments, the managed investment account (MIA) offers the dual benefits of institutional money management expertise and the ability to limit downside risk.
“The task of managing assets becomes more complex and demanding as investors accumulate assets,” says John Nave, president of Brentwood Advisors LLC. “This is compounded by the fact that as they get older, there’s less room for error.”
Smart Business spoke with Nave about what makes MIAs especially relevant in today’s investment marketplace and how different types of advisory services can influence investment success almost as much as the types of investments selected.
How does an MIA work?
Investment houses create custom asset allocation models with specific investor goals and objectives in mind, and then select institutional money managers based on their expertise overseeing the asset classes specified. These models have been proven and refined over time, but until relatively recently, some of the very best simply weren’t accessible to ‘average’ individual investors. They were offered exclusively to managers of huge pension funds and other institutional-type investors. Now, by creating a distribution network of select local advisory services to offer MIAs, investment houses like SEI, Genworth Financial and others are able to pool individual investor money and provide that same institutional investment expertise to average investors. Local advisory services provide the front-line investment advice and expertise necessary to create a custom asset allocation model for the individual investor. Based on that model, they then help ‘cherry pick’ the best institutional money managers available, oversee a continual process of balancing and rebalancing over time, and ensure that the investments selected in any managed investment account are correctly matched to the individual investor’s goals and objectives. For this reason, the role of the front-line adviser is critical, since each MIA has its own unique asset allocation mix and since managed investment accounts are simply one of many choices available to consider, along with other types of investment vehicles and approaches (depending on your unique individual circumstances).
What makes MIAs so timely?
The biggest selling point of the MIA is how it protects the investor’s downside. The current investment climate is obviously volatile, and protecting downside risk has become more important. Also, those who have accumulated wealth over a long period don’t want to see it wiped out overnight. Risk-averse investors are always the first to see the benefits of extreme diversification through MIAs. As confidence in market performance continues to erode, a much broader range of investors is starting to take a closer look at what MIAs have to offer not just those who are in more risk-averse investment life cycle stages. Unfortunately, many investors simply fail to recognize the need for or benefit of MIAs when the market is up everybody’s a genius when everything is up. When markets fall, more investors are caught off-guard or are in denial and don’t start losing their appetite for high-risk investments until it’s too late. When the ups and downs become more volatile, and you have a limited amount of time to keep your eye on what’s going on, an MIA protects your downside and provides greater peace of mind.
Who are MIAs not suited for?
The knock on MIAs to the aggressive investor, at least is that your upside may be limited. You don’t get the full gain when the market is up because your assets are allocated to minimize risk. But, that’s a trade-off with an upside: In a down market, you’re protected, especially now, as the market continues to be searching for a bottoming-out point. Investors who are solely focused on gains simply may not have the patience for the MIA approach. Even so, they might be wise to put at least a portion of their available investment assets into some kind of MIA, as a sort of insurance policy a hedge in case the market takes a turn for the worse.
Do different types of investment and advisory services influence the results differently?
The key is for the local advisory service to have as many tools in the toolbox as possible. Some investment services offer their own proprietary funds, and there is always the danger be it perceived or real of internal bias favoring the services’ own proprietary product. They have a lot tied up in it, so it’s only natural that they are going to have a vested interest in promoting it. A proprietary fund cannot be the best choice in all situations. Investors need to be aware and cautious when approached about any proprietary offering, to make sure it is actually suited for their situation. With an MIA, the thing that works in your favor is that the costs are minimized (shared), the best money managers are custom selected to match your situation and the front-line advisory service that you work with doesn’t come out ahead unless the investment grows and you come out ahead. The local advisory service and the investment client are both on the same side of the table, as it were. You don’t have the potential conflict of interest that you might have with a proprietary fund, and you don’t have the incentive to transact in order to generate transaction fees that you have with brokerage firms and trading houses.
JOHN NAVE is the president of Brentwood Advisors, LLC. Reach him at (412) 308-2095 or firstname.lastname@example.org.