Practice management BIG Michael Kitces warned advisors against using customized portfolios and recommended direct indexing as the best way for clients looking for a customized portfolio experience.
Morningstar‘s Christine Benz popular advisor-centric podcaster interviewed Michael last week to gain his take on customizing portfolios.
In their one-hour program, posted on YouTube, Kitces threw a wet blanket on the practice. Michael says Investors lose two important benefits of portfolio management; benchmarking and manager ranking. Both research components that Morningstar offers.
Kitces did a good job explaining Morningstar’s traditional mutual fund research that tracks managers and offers benchmark visibility.
Kitces said model portfolios are another option that he favored over customization.
He did carve out an exception for customization. He said in his practice he worked with a lot of government people who worked for various agencies who could not buy certain stocks.
For example, if you work for the FDA you could not buy drug stocks, or if you work for the FAA you could not buy airline stocks and so forth. In that case, customization makes sense because of the restrictions imposed on those investors because of their employment.
Beyond that, he made it clear that customization was a bad idea.
