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Keep it cheap and simple with balanced funds

Constructing portfolios for clients can be time-consuming, and though some advisors see it as a way to earn revenue and add value, others suggest that clients may be better served by a simple, inexpensive balanced fund or group of funds to achieve diversification and meet their investment goals.

“I would say that all advisors should be either using balanced funds for their clients or creating a balanced fund by working with money managers,” said Rick Rummage, president and career consultant at The Rummage Group in Herndon, Virginia, which trains advisors. “If the greatest minds on Wall Street cannot beat averages, why does Sam Schmuck managing a few multi-million-dollar accounts think he can or should be able to do it?”

Brian Haehl, a CFP and the founder and principal at Financial Strategies by Seven Sages, an independent brokerage firm in New Albany, Indiana, takes that message to heart.

“I don’t believe that client-facing individuals have the ability or the time to be managing the balancing of a client’s portfolio,” he said, referring to both the developing and the periodic rebalancing of a diversified portfolio. “Instead, our job is to manage the relationship with our clients and to work with a group of money managers to get clients to where they want to go.”

Haele uses multiple balanced funds to achieve the larger balance suited to particular clients.

“There’s no simple one-fund solution for clients, just like McDonalds is not right for everybody either,” he said.

Haele said that he likes using multiple funds because he is getting the “wisdom of multiple experts.”

“The advantage of using balanced funds in a portfolio is their simplicity and relatively low cost,” said David Blanchett, head of retirement research at Morningstar Investment Managers in Chicago.

“A lot of it goes to how an advisor defines their value proposition,” he said. “An advisor who thinks he can build clients a better portfolio than Morgan Stanley should do it, but a lot of research says that’s hard to do.”

Another option would be for the more hands-on advisor to build a balanced portfolio of ETFs, Blanchett said.

“The costs should come out pretty much the same,” he said.

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