Investors: Understand the importance of asset allocation

It's widely agreed that asset allocation is the largest determinant of long-term investment performance, much more so than picking the right stocks or trying to identify the right muni-bond fund.

Recently, the proliferation of target-date funds and so-called robo-advisors has led many to conclude that financial advisors have lost the opportunity to differentiate with asset allocation advice, and there is little reason consumers should pay much, if anything, for this aspect of wealth management.

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Certified financial planner Joel Bruckenstein said it plainly in a recent issue of Financial Advisor magazine: "I would argue that asset allocation services are becoming commoditized," he wrote.

While Bruckenstein's article made a number of good points, I believe this mind-set can prove dangerous and that, as an industry, we are doing a disservice to consumers if we dissuade them from proper diligence into how they select asset allocation.

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To "commoditize" means to render a good or service widely available and interchangeable with one provided by another company or source. For example, airline travel is largely commoditized. Purple cabin lighting and seatback DirectTV or not, you probably won't pay more for one airline than another for the same flight.

Many major index funds are commoditized. You can buy an S&P 500 index fund from a handful of providers with no meaningful difference.

But if asset allocation is truly commoditized, it must pass one simple test: Are the outcomes similar?

I checked a few of the better-known online options to see what they recommended for me. Looking at four online portfolios and a Vanguard Target Date Fund, here's what I found:

• U.S. equities range: 32 percent to 63 percent
• International equities range: 18 percent to 48 percent
• Bonds range: 10 percent to 50 percent
• Alternatives: 0 percent to 14 percent

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I then changed my age, 40, to 65 and looked again. One site did not offer support for people in retirement. For the others, here's the range of recommendations for each asset class:

• U.S. equities range: 23 percent to 41 percent
• International equities range: 15 percent to 31 percent
• Bonds range: 23 percent to 49 percent
• Alternatives: 0 percent to 8 percent

There are several important points here that will make a big difference over time. A few major ones include:

• Simple amount of stocks and bonds.
• Aggressive allocations to international stocks (emerging markets allocations also varied widely).
• Inclusion of alternatives (often in the form of real estate investment trusts), or not.
• Some have a big small-cap and/or value bias, while others don't.
• Number of securities in portfolio ranged from three to 12.

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Outside the online-only world, the differences can be even more extreme. A major investment advisor I used to work for would recommend 100 percent equities for someone like me. A lot of people find that strange, but if you assume I can stick with it through the swings, odds are that approach will leave me with more money at retirement.

This advisor would probably also recommend 100 percent equities to a 65-year-old just entering retirement. I prefer some diversification because "odds are" doesn't help if history doesn't repeat itself, and for me a little extra growth is not as important as protecting against a really bad scenario. Also, my job is highly impacted by market returns.

That's the other big issue: None of the online-only services really learned much about me. At least with my former employer, they'd have a conversation with a client.

With online-only portfolios, the only consistent question was my age. The number of questions beyond that ranged from zero (target-date fund) to six. The average was about three.

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If you're young and have no unique circumstances that impact your investments and no major cash-flow requirements before retirement, then three questions might be enough to identify a proper asset allocation. For most people, I think the stakes are too high for that to be sufficient.

It is pretty easy to look at history and create a portfolio that would have done well. It is a whole different task to manage assets and generate desired retirement income. A lot of it comes down to philosophical beliefs.

Financial Engines, for example, has a relatively new service for retired folks that often recommends high bond allocations and annuities. The firm views the world as highly uncertain and prefers guaranteed income. Other very smart people conclude you need high equity allocations to protect against inflation and achieve growth.

The point of this article is not to question who is right but merely to point out that there are big differences. These days, you can get an asset allocation recommendation pretty much for free, but that doesn't mean you should take it.

That's not to say you get what you pay for. When you buy a suit, if you pay more, you generally get a better suit. With investments, paying more for advice doesn't mean a better result—usually it's the opposite.

The ability for individual investors to see a number of diversified asset allocation recommendations for little or no cost online is a great thing. Even for professionals, it creates a valuable sharing of ideas.

When someone else has different allocation ideas or uses different exchange-traded funds to fill an allocation, I want to examine why. For some individuals, the relatively recent ability to quickly and cheaply invest in any generally diversified portfolio is a fantastic development.

But asset allocations vary meaningfully. The one you choose and how you manage it over time will mean a lot more—or a lot fewer—dollars to enjoy in your retirement.

—By Craig Birk, special to CNBC.com. Birk is a certified financial planner and executive vice president of portfolio management at Personal Capital.