Over the past 20 years, an entire industry has been developed from the simple concept that Markowitz put forth that the majority of the total performance of a portfolio results from the mix of investment asset classes contained in the portfolio. This simple concept is the cornerstone of modern portfolio theory(MPT).
The industry spawned by the advent of MPT is known as investment management consulting. This group of consultants stands ready to advise the investing community on the correct allocation of different investment vehicles that should properly be held in a portfolio to achieve the stated investment policy. As is true of most objectives, there is normally a multitude of ways to achieve the stated goal. Through consultation with the client and study of market history, the investment consultant will design a portfolio allocation model that will drive the investment returns of the client toward a stated goal. The consultant will also assist the investor in developing a stated goal or policy that is consistent with the asset allocation model. Institutional investors such as pension plans, endowments, and wealthy individuals have historically hired investment consultants to address long-term investment objectives and policy questions related to asset allocation issues. These institutional investors have a fiduciary obligation to protect the interest of their investors. One way to protect the interest of their investors as well as reduce their own potential liability is to hire a consultant to monitor the investment-related issues. The consultant’s job is to advise the client on the correct mix of investments and monitor the underlying performance of those investments to be certain that they remain consistent with the policy objective.
In the past, the complex mathematics embedded in the consultant’s practice, along with the myriad of data required to perform the asset allocation analysis, limited the accessibility of investment consulting to larger institutional investors. However, the rapid growth in the power of the personal computer along with the democratization of data via the Internet and the accessibility of modestly priced statistical software have combined to bring asset allocation modeling within the reach of even the smallest individual investor. Web sites offering asset allocation advice and online calculations have proliferated. Modestly priced financial planning and asset allocation software is widely available. Traditional Wall Street brokerage firms as well as discount brokerage firms have asset allocation investment programs available to their clients in some form. Mutual fund complexes and 401(k) providers often offer asset allocation advice to their clients as well. The practical application and administration of the asset allocation process is more difficult than most people realize. There can be many ways to arrive at the same goal, but there are often practical constraints in getting to the stated objective.