Lately, I've seen more and better thinking about asset management than you could find in the previous 20 years in the profession and I think it may be time to give modern portfolio theory a makeover. In fact, I think this fits a long-standing historical pattern.

How so? If you can remember all the way back to the 1970s, professionals were the only ones who had access to the mutual fund data. There was a huge knowledge gap between the professional broker and the average consumer, who had nothing comparable to the old Weisenberger tables. Eventually, mutual fund data was more widely available and the gap between professional and consumer closed.

Advisors leaped ahead again in the late 1980s when they embraced modern portfolio theory and for about 10 years (during the rise of the AUM business model) professionals had a significant advantage over retail investors. The gap closed again and, since the turn of the century, it has become accepted wisdom that astute individual investors can probably do about as well managing their portfolios as the best advisors.

I think we are in the early stages of creating another gap between advisors and laypersons; that is, another time period when professional RIAs will have more tools, information and sophistication at their disposal than their clients.

In fact, I've created a new conference this fall (October 13-15 in Chicago; to explore in detail the emergent investment sophistications in the advisory world.  Among the speakers: Harold Evensky, Bill Bengen, Michael Kitces, Don Phillips, Tom Giachetti, Mark Tibergien and Stephanie Bogan. 

One of the most interesting topics, which I cover in detail in the August issue of my newsletter and that will also be explored at our conference, is Enterprise Risk Management. 

An advisor with 25 years as a consultant to Fortune 500 companies talks about ERM as an offshoot of MPT. But unlike MPT, ERM has progressed dramatically. MPT uses one number for an investment's volatility. ERM looks at how an investment's volatility correlates with market and economic conditions, and instead of using one number, it uses a spectrum. It does similar things with correlation coefficients and expected returns. 

The tools to do these things in the corporate world are complex: copula systems, GARCH models, structural uncertainty measurements, but most of that can be put into future software programs, and the data is already out there. They suggest that advisors do what corporate managers and consultants do as a matter of managerial routine: constantly assess the economic and market conditions, constantly assess the portfolio's responses to changes in these conditions, and look at making changes based on how investments have behaved under similar circumstances in the past. 

Conceptually, this is not rocket science, but some of the mathematics might challenge the rocket scientist's facility with numbers -- and it is certainly beyond even the astute layperson's grasp.

I think we'll know more after the meeting in October than we do today; in fact, that event may usher in the next round of advisor dominance in the world of investing.

The last time this happened, the profession gave birth to a new business model and took off from a revenue standpoint. Are we on the verge of something similar today?

What do you think?


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