Living near food-obsessed Philadelphia makes it easy to find great places to eat. There are hidden gems and longstanding institutions for every craving imaginable. People’s tastes vary, but I’ve found that, as with a financial advisor, people value authenticity above all else.
Diners and investors both appreciate establishments that are up-front about who they are and what they do. A rustic eatery or burger bar can be just as beloved as haute cuisine. In the same vein, advisors with different investment approaches can all experience similar success.
Previously, I stressed the importance of a value statement. In this post, I’d like to focus on why setting an investment strategy that aligns with the values in your statement is vital.
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Here are some of the most important facets to keep in mind when building investment plans with your clients.
Define and refine your approach
Your investment strategy should reflect your beliefs but also consider clients’ unique needs. Remember, the active-passive decision isn’t a binary choice, so you don’t have to sit exclusively at one table or the other.
Instead, you should work to use each effectively. This could mean different things for each client. Strike a balance that supports a client’s long-term goals without coming into conflict with the client’s risk tolerances.
Identify effective active managers
Active funds appeal to clients’ hunger for outperformance, but not all active managers are worth their salt (or, more accurately, their fees). Active managers’ success lies in their:
- Talent: This is the manager’s ability to pick successful funds and produce a high gross alpha expectation. Apply due diligence to evaluate a manager’s performance and determine the gross alpha expectation.
- Costs: The effect of costs is clear. Subtract them from the gross alpha expectation to determine a manager’s net alpha expectation. If that number doesn’t warrant the risk, it might be prudent to look for another manager.
- Patience: Active managers should stick to their strategy regardless of market downturns. If a manager isn’t confident in the strategy over the long term, you shouldn’t be either.
Do your homework to help ensure that any active manager you consider for your clients can satisfy all three criteria. Picking the wrong manager could threaten your long-term strategy and shake clients’ confidence in your services.
Steady the ship with passive
The more active assets in a portfolio, the more likely it’ll experience return volatility. That variability can frazzle some clients’ nerves—roller coasters simply aren’t for everyone.
Some advisors promise clients a sense of security and peace of mind. Why not carry that throughout the investment strategy? Portfolios that produce consistent returns can help keep clients’ emotions in check.
You can help deliver a smoother ride to clients by adding passive funds to a portfolio to shrink its performance distribution. Effective active-passive combinations can help you avoid volatile swings that make anxious clients want to abandon ship.
Read the full article by Mike Lucci of Vanguard