A guide for the individual investor|
seeking professional management
for their investment portfolio
President and Senior Portfolio Manager
INVESTMENT ADVISOR SELECTION
| What should an individual want to know about an investment advisor and what should he or she expect from investment advisors?
- WHAT SHOULD A CLIENT EXPECT FROM INVESTMENT ADVISORS?
- You should receive advice on asset allocation. Specifically the allocation of assets to specific classes of assets given an assessment of your risk tolerance level.
- You should expect advice on specific security selection within each class of asset. For instance, with stocks you would look for specific selections within industry groups.
- You should receive advice on when and how to adjust assets among asset classes given passage through the business cycle.
- You should be able to see implementation of this investment strategy and selections without excessive transaction costs, while minimizing unnecessary taxable gain realization at fee levels below the level of the average managed no-load mutual fund.
- You should expect the advisor will follow your security positions and provide written correspondence that is specific to your holdings and personal investment goals.
- WHAT INFORMATION SHOULD AN INVESTMENT ADVISOR PROVIDE TO A CLIENT?
- You should receive an informational brochure detailing Part II of Form ADV which is on file with the Securities & Exchange Commission. This document describes important information such as the investment advisor's methods of doing business, amount of compensation, and types of investments the firm advises on.
- You should receive an investment advisory contract which describes the terms of engaging the investment advisor. Prior to signing this document, you should review the contract and understand the terms.
- You should know the operating characteristics of the investment advisor as discussed in the next section C.
- You should understand the investment philosophy of the investment advisor operates as discussed in the next section D.
- You should feel confident the investment advisor has disclosed all relevant information on their services.
- WHAT SHOULD AN INDIVIDUAL WANT TO KNOW ABOUT THE
OPERATING CHARACTERISTICS OF AN INVESTMENT ADVISOR?
- Size of total assets managed: Boasting of the amount of money under management is a common marketing pitch to imply investment skills. It is important to recognize large amounts under management frequently are the result of managing a few large accounts. Although $900 million under management seems impressive, the firm's senior investment talent typically are focused on their large accounts. An individual often will receive more personalized attention from a firm managing between $75 to $250 million.
- Account size: A good measurement of attention to your account is the size of an average new account, and approximate size range of accounts managed. A manager handling accounts ranging from $1 million to $20 million, with typical accounts of $5 million probably will be less attentive to $300,000 to $800,000 portfolios. Conversely, a manager handling accounts ranging from $200,000 to $700,000 may be overwhelmed with a $5 million portfolio.
- Type of accounts under management: Many advisory firms focus on large institutional and pension money. Ideally individuals should seek managers who concentrate on individual accounts. Understanding each individual client's investment objectives and creating a portfolio that fits their specific tax and personal circumstances requires a substantially higher level of effort than investing institutional money.
- Number of accounts per manager: Often overlooked, a manager handling 250 accounts simply cannot give the same level of personal attention to your specific portfolio than a manager handling 50 accounts.
- Account minimums: Identify an advisor's recommended minimum account size. If your portfolio is either near or below their minimum size, you are too small of an account for that advisor.
- Determine exactly who will manage your money: Your account should be handled by a seasoned, senior portfolio manager. Your contact should be with this manager, not a marketing person or an account administrator. Avoid firms where after an initial meeting with a seasoned manager, account management is turned over to less experienced staff.
- Accessibility to your portfolio manager: Find an advisor with a commitment to individuals. This is best measured by their accessibility to answer questions and provide personal service both for yourself, your spouse, and other family members. In essence, personal chemistry between advisor and client is crucial to a long term relationship.
- Ownership: Determine if your portfolio manager is principal of the firm. This provides stability to your relationship. An owner is more interested in pursuing long term relationships, and providing continuity to a strategy. Many banks, investment advisors, and brokerage firms experience a continuous turnover of key personnel. This turnover is avoided by simply seeking out principals to manage your money.
- WHAT SHOULD AN INDIVIDUAL WANT TO KNOW ABOUT THE
INVESTMENT PHILOSOPHY OF AN ADVISOR?
- Investment Style: The most important factor in selecting your advisor is to find a match with an investment style with which you are comfortable. If you have spent your life making conservative decisions, you will feel most comfortable selecting a conservative manager who thinks in a similar fashion as you. To understand a manager's style, ask how they would go about building a portfolio for you. One would expect the manager to ask about your specific needs before attempting to answer this question. Look for a logical and understandable approach towards handling your money.
- Investing versus trading: Long term managers tend to buy and hold securities for the long term and believe in the preservation of capital through conservative investing. Although trading may generate profits, the additional transaction and income tax costs steer many managers towards a more traditional investment approach.
- Type of Investments: With investments, risk and return are always linked together. Higher returns tend to be derived from higher risk securities. If you seek a conservative, lower risk investment style, your manager should be advising a strategy focused on high quality stocks and bonds. This type of manager typically would not suggest increasing returns by employing higher risk strategies that use options, futures, derivatives, commodities, or margin accounts.
- Client Involvement: An important consideration in selecting a manager is whether your account is handled on a discretionary or non-discretionary basis. Discretion gives the manager control over your investment decisions. The advantage of discretion is a busy person does not have to deal with their money. With a non-discretionary basis, you are more involved with your portfolio. If you wish to approve the portfolio stocks, or want to provide input into an investment, non-discretion keeps an ongoing dialogue with your advisor. Communication is especially important when designing investment plans and objectives, or with substantial shifts in portfolio strategy.
- Performance numbers: Be wary of an advisor who provides performance numbers as the reason to handle your business. Without a uniform standard of measurement, creative marketers can portray an impressive track record by using selected time periods. Nonetheless, a manager with discretion over investing should have relevant market performance benchmark data to compare performance. Remember, however, that all performance numbers focus on the past when the concern should be focused on the future.
- Research: Often, access to database and brokerage research is overemphasized. As most seasoned managers spend a substantial amount of time analyzing differing sources of information, they tend to rely on their own judgments when making recommendations. Although it may be informative to understand portfolio selection, be sure the final step of the selection process is determining the appropriateness of an idea for your portfolio.