Solutions-based products are not yet widely known among investors and even advisors. Out of the 722 broker-dealers, RIAs and mid-sized advisors surveyed by FA-IQ sister publication Ignites Research in March to May last year, 57% said they use the products. Around 29% do not use them, and the rest are uncertain if any of the products they use fall under the category of solutions-based products.
The extent of the definition of solutions-based products differs among the advisors who use the products, but there is a consensus that they are aimed at providing an outcome or a goal. Thirty percent of the advisors surveyed say they should also have advice built into them, such as in the case of target-date funds, while 31% of the advisors says they should also have advice built into them plus be designed for a specific demographic.
Other examples of solutions-based products are absolute-return funds, tactical asset allocation funds, target-risk funds, variable annuities and 529 funds.
“If a client comes to me with well-defined goals and constraints, those are what I’m going to pick up on to determine if a solutions-based product is appropriate for the client,” says Steven Gattuso, Buffalo, N.Y.-based senior portfolio manager at Courier Capital, an RIA managing around $1.2 billion. “We know what the solutions-based product is meant to achieve, and we determine if the product is appropriate for the client.”
The top three reasons cited by advisors for using solutions-based products are their clients’ time horizon objective, diversification and risk/volatility management.
Solutions-based products are like a one-stop shopping approach to investing, says Paul Miller, Burlington, Mass.-based portfolio management director at broker-dealer Axial Financial Group, managing $1.2 billion.
“Although it’s not 100% guaranteed that the product will meet our client’s goal, there’s a predictability to it,” he says. “We know we’re only taking a 20% interest risk, for example, instead of owning a portfolio straight up. And we know we’re going to get a 4% cash flow, for example, and that’s pretty predictable based on the underlying holdings.”
Among advisors, more broker-dealers (65%) and mid-sized advisors (66%) use solutions-based products than RIAs (39%). RIAs are less likely to outsource some of their investment expertise to a package of product because “they are more likely than advisors in other channels to consider investment selection and portfolio construction as core parts of their value proposition,” Ignites Research says in a report published in June, “Positioning Solutions-Based Products.”
Key Financial, which manages around $700 million, is an example of a broker-dealer that doesn’t use solutions-based products.
“We’re financial planners. We’re figuring out what the portfolio needs to do and we’re managing to the clients’ goals, so we don’t need one product that does that,” says Patricia Brennan, the firm’s Philadelphia-based president.
Out of the 412 advisors in the Ignites Research survey who use solutions-based products, 46% of the advisors allocate 6%-20% of their clients’ assets to the products. A quarter of the advisors allocate up to 5% of their clients’ assets to the products, while 13% allocate 21% to 40%, and 15% allocate a minimum of 41%.
The most popular solutions-based products among advisors who use the products are income-oriented solutions (used by 65% of the advisors), tactical allocation funds (50%) and absolute-return funds (47%).
Axial Financial uses fixed income solutions-based products packaged by BlackRock and designed for low volatility, says Miller.
“We try to achieve a specific rate of return with the least amount of volatility as possible, and we have at least a couple of hundreds of millions in those BlackRock products,” he says.
The top five characteristics advisors look for in a solutions-based product are its ability to solve a problem or meet a goal, track record, transparency, product manager expertise and asset allocation.
“I like the transparency of the expected outcome of a solutions-based product,” says Axial Financial’s Miller. “In the model we use the most, we know exactly how much interest rate risk we’re taking relative to the Barclays U.S. Aggregate Index. We know exactly how much credit risk we have relative to the index, the risk direction, the yield expectation.”
Although the data it derives from tracking a solutions-based product’s underlying investments and a benchmark are “obviously not a guarantee,” Miller finds comfort in having “some certainty that we are allocating for the right potential outcome.”
BlackRock’s proprietary technology platform, Aladdin, is a key differentiator among solutions-based product providers, says Miller.
Aladdin provides a centralized database for maintaining financial information including positions, transactions, prices, security data and analytics. This approach is designed to eliminate redundant data input, enhance data integrity and significantly reduce operational risk while simultaneously increasing operating leverage and consistency.
“BlackRock is able to drill down and analyze the holdings of an entire portfolio using its Aladdin system that provides that level of granularity that can give us the level of detail that we need,” says Miller. “That’s important because these are not static portfolios by any means, and this isn’t a buy-and-hold strategy for us. We allocate on a quarterly basis, at least, based on the Aladdin data.”
The top five solutions-based product providers, according to the advisors surveyed by Ignites Research, are BlackRock, American Funds, First Eagle, Pimco and Vanguard.
About Axial Financial Group
Axial Financial Group has been providing individuals and organizations with financial guidance since 2006. Located at 5 Burlington Woods, Suite 102, the firm prides itself on crafting unique strategies for each client. For more information, please visit www.Axialco.com. A Member of Axial Financial Network, LLC Axial Financial Group and Commonwealth Financial Network are Separate and Unrelated Entities. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Fixed Insurance products and services offered through Axial Financial Group. *based on 2016 production
About Commonwealth Financial Network
Founded in 1979, Commonwealth Financial Network, member FINRA/SIPC, is the nation’s largest privately held independent broker/dealer–RIA, with headquarters in Waltham, Massachusetts, and San Diego, California. The firm supports 1,710 independent advisors nationwide in serving their clients as registered representatives, investment adviser representatives, and registered investment advisers, as well as through hybrid service models. For more information, please visit www.commonwealth.com.