3 ways to use asset allocation strategies to add value

In a record-breaking year for ETFs, asset allocation strategies were particularly popular, says Caitlin Ebanks, director for ETFs, CIBC Asset Management.

She said ETFs saw new inflows of $125 billion in Canada last year, with asset allocation ETFs offering a convenient way for investors to get diversified exposure to different asset classes.

“They are designed to make portfolio building easier, giving investors an efficient way to match their investments to their risk tolerance and, essentially, their financial goals,” she said in a Jan. 7 interview.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Whether using active or passive management, these multi-asset ETFs span the full range of risk profiles, from all-bond portfolios to all equity, she said. Generally, asset allocation ETFs fall into five categories: fixed income, conservative, balanced, growth, and all equity.

One key trend in this space is the growing use of active strategies, either by including active ETFs alongside passive ones or by adding an active overlay to otherwise static ETF portfolios, Ebanks said.

“What I mean by that is they have a portfolio manager that is overweighting or underweighting certain geographies, for instance, trying to add or generate additional alpha on these asset allocation portfolios using an active allocation tilt to passive investing.”  

Ebanks outlined three ways advisors can leverage asset allocation ETFs while providing value to clients.

1. Serve and scale younger, accumulating clients

These low-cost, all-in-one portfolios can help advisors efficiently onboard and manage younger investors and smaller accounts, she said. And this would allow advisors to focus on financial planning, tax advice and major life events, rather than security selection.

“These clients often leverage and value the advisor’s financial planning and tax expertise, as they are embarking on a variety of life events: buying a house, saving for retirement and children’s education, as well as focusing on accelerating their income and their careers,” she said.

2. Control costs while maintaining diversification

Advisors can deploy asset allocation strategies in smaller or contribution-limited accounts where transaction costs and account size make traditional model replication inefficient, she said.

For instance, the max contribution for RESPs is $2,500 per year per child, up to a maximum of $50,000 in lifetime contributions per child, she said.

“As these accounts are growing, it is challenging to properly diversify them in a cost-efficient way using individual securities,” she said. “These asset allocation portfolios with a variety of risk profiles are a perfect solution for these types of accounts.”

3. Simplify cash and portfolio management

Advisors can also use asset allocation solutions as a single-ticket investment for new contributions, or cash flow from distributions or dividends, Ebanks said.

“This allows clients to remain fully invested until a quarterly or semi-annual account rebalance is scheduled,” she said. “This keeps the portfolio inline, or onside from a compliance perspective with the investment policy statement. In other words, a growth investor doesn’t have a cash drag and can maintain their risk preference if they were to buy a growth or all-equity asset allocation ETF at a very minimal cost.”

When designing these portfolios, Ebanks said the first step is to figure out how many models are needed for the client’s risk profile and investment timeline.

Next, think about factors such as index quality, the type of market exposure required, liquidity, and whether to add custom or satellite positions, she said.

“This could include active strategies, alternatives or specific factor sector tilts. Building these models does require more work, especially when it comes to deciding on the right weightings for each security.”

Finally, be sure to rebalance and monitor the portfolio, she said.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.