Understanding the Investment Function in Greater Depth

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Understanding the Investment Function in Greater Depth

May 20, 2014

by Tom Brakke

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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

A copy of Tom’s ebook, Letters to a Young Analyst, can be downloaded here.

In late 2010, I published a series of letters to someone who was about to enter the investment industry.  In March of this year, they became the foundation for an ebook, Letters to a Young Analyst, which includes advice and resources for aspiring investment professionals.

Despite the title, the book is not exclusively for a narrow slice of those professionals.  I addressed that question in the introduction:  “An analyst, then, is simply someone who analyzes, who examines an investment problem with a critical eye.  Viewed in that way, the general principles in this book apply broadly to a wide variety of roles.”

Advisors and their firms will find the book of interest for a number of reasons:

  • Growing advisory firms face important choices about how to structure and staff the investment function.  Learning more about investment decision-making processes is an essential part of making informed choices on how to proceed.
  • Those members of a firm who specialize in investments should spend a good deal of time focusing on methods, and the firm should have a training plan for them that is geared toward generating differential analyses over time rather than the same approach used by other firms.
  • The investment industry faces a number of challenges going forward (and therefore opportunities as well).  The book touches on many of them, including the conflicts between the business models of firms and the needs of clients, the disjointed pursuit of relative performance in the face of absolute client goals, and destructive industry practices.
  • Advisors and advisory firms often don’t have great visibility into the workings of other kinds of investment organizations, including research firms and asset managers.  Advisors improve their chances of making good decisions about using the products and analyses of others by learning about those organizations and their people more deeply.

It is this last point that I’ll explore more fully here.  True understanding of an asset management organization, for example, is difficult to come by, as I wrote in a 2009 piece for Advisor Perspectives, Due Diligence from a Distance.  Therefore, it’s important to build a base of knowledge about how investment decisions are made in those firms, so that you know the questions to ask and you have the opportunity for a more fully-formed diagnosis of the issues at play.  Those goals remain elusive for most advisory firms.

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