What if Asset Managers Switched with Advisors?

One thing has not made sense to me.

Why does the first and likely the most important step of investing, which determines 95% of investment outcomes, is typically in the hands of Financial Advisors (including Wealth Managers and Consultants), while the second step, which barely moves the needle, belongs to Asset Managers?

The first step is, of course, asset allocation and the second is active investing. We have heard the mantra that asset allocation determines more than 95% of portfolio’s outcomes many times, yet nothing really changes. Investors own some static mix of stocks / bonds / alternatives which can be easily replicated with a couple ETFs from Vanguard for a much lower cost and typically better result.

Asset allocation is not a pie-chart, it’s an actual investing philosophy (link). For example, David Swensen has spent years developing his endowment model investment approach. Ray Dalio has done the same for risk parity. Warren Buffett is good with mainly stocks for the long-run. Cliff Asness advocates factor-based approaches. But for most families and institutions, these are just niche product allocations and not adopted investment philosophies for the entire portfolio. More so, you cannot give your total portfolio to any of the above asset managers. So it’s up to the Financial Advisor to implement / adapt / transfer these philosophies to their client portfolios with all the constraints and simplifications required, which produces sub-par results.

Most static ‘pie-chart’ model portfolios are templates that are ‘customized’ to fit client needs better. Yet in reality, the customization rarely changes the overall profile of the returns. Portfolios either crash too much or don’t earn enough on the upside (link). The templates are generated by a small team run by a chief investment officer in the home office, or purchased for an additional fee from a third party model provider. At any rate, the total portfolio is not constructed by the likes of Ray Dalio and David Swensen.

What would happen if Asset Managers switched places with the Financial Advisors and directly managed the entire portfolios? In addition to spending all the resources trying to outperform some benchmark, the result of which mostly gets washed out in the total portfolio setting, what if Asset Managers also developed active total portfolio approaches? Then, the Financial Advisers could provide higher quality services for client’s all other financial needs outside the investment portfolio.