Financial Advisors Who Actively Allocate to Passive Indexes

Three Questions with Rob Lloyd, CFA:

We asked Houston-based financial advisor Rob Lloyd to answer three questions why he chooses to actively allocate client portfolios to passive indexes.

Q: Why do you believe actively allocating to passive index funds is a thoughtful approach for investors to consider?

Rob: It seem counter-intuitive that index funds would routinely beat active portfolio managers. After all, with all their brains, research and technology, surely a good management team can beat their benchmark. Sadly, the evidence shows exactly the opposite. Standard & Poor’s generates a report several times per year called the S&P Indexes v. Actives (SPIVA) Scorecard. It indicates that active managers consistently underperform their benchmarks in a variety of environments and time periods. Until this trend changes, investors should focus their research on index selection and not security selection. Index fund investing is also less expensive than active fund investing. Without research, personnel, and other overhead expenses, index fund management is quite cheap. The performance history and expense profile of active managers compared to index funds has attracted trillions of dollars into index based strategies. We think index funds make a lot of sense. Additionally, asset allocation choices between stocks and bonds are recognized as major factors in overall portfolio performance. For this reason, we think an index strategy that focuses on asset allocation is an effective strategy in this environment.

Q: How frequently do you rebalance your allocations and why?

Rob: Asset allocations may be slightly modified month-to-month, but larger changes to asset allocations occur less frequently. The key factors we use in our investment process are economic, fundamental, technical and quantitative. Economic factors describe the health of the economy and credit conditions. Fundamental factors are expressed by companies in their earnings reports. Technical factors are derived from market trends and price indicators. Quantitative factors are formulated from an analysis of economic, fundamental and technical data points. Our research process incorporates these different views and guides us in rebalancing our asset allocation through the market cycle.

Q: What are the most important factors you consider to determine the initial asset allocation for a new client?

Rob: The initial asset allocation recommendation for a new family is the result of a multi-step process. For families that are new to us, it is extremely important to determine the long term asset allocation target. Every family is different regarding savings, spending, time horizon and risk tolerance. With a careful analysis, we estimate the blend of stocks, bonds and cash most likely to help the family succeed at achieving their long-term goals over the next 10, 20 or 30 years. Once that overall target allocation is selected, each individual account is assigned their own asset allocation after considering the tax status of the account. Typically, taxable accounts which are managed conservatively are drawn first, while accounts with longer investment time horizons may be more invested more aggressively. Additionally, each individual account may be overweight or underweight risk depending on decisions by the portfolio managers. All long-term allocation decisions must first be approved by the family before moving ahead to invest in our discretionary portfolios.

Get to Know Rob Lloyd:

Lloyds Intrepid Wealth Management Rob Lloyd, CFA

The Woodlands, Texas

Serving Clients Nationwide

Explainer of markets, plans and portfolios.

Areas of Focus

Employee Stock Options Estate Planning Investing Investment Management Retirement Planning

View Rob’s profile page on Wealthtender or visit his website to learn more.