This is part of a series of blog posts in which Edden Kift (as my co-author) and I will attempt to examine and unpack some of the common areas of practice management which financial advisers, who are often also business owners, need to act upon on as they strive to build and run a world class financial advice practice and deliver a superior client experience.
“A quality investment philosophy is like a good diet: it only works if it is sensible over the long haul and you stick it"
~ Michael Mauboussin – Author of More than you Know
Whilst more and more advice propositions are focusing on cashflow planning and lifestyle financial planning, an investment strategy will still likely form a crucial part of the client’s plan. Having an investment philosophy provides a compass and set of principles which the adviser firm and its clients can refer to throughout the investment journey. As Warren Buffet says, “Risk comes from not knowing what you are doing”. It will help keep everyone focused on the process and less focused on the inevitable short-term noise.
In the same way a GPS or map can guide you from A to B, a good investment philosophy or investment policy statement can provide guiderails for which principles to apply and what actions should be taken in line with those principles. The unexpected can and will always occur, which is why sometimes the route plotted on a GPS will need to be changed as traffic conditions change.
When markets test one’s resolve, having an investment philosophy can act as reminder of why a client’s portfolio is invested the way it is and provide measured and critical context for how to respond (or not) as markets experience the inevitable ups and downs.
It should be clear, concise and easy to understand. And it should be something that is regularly referred to, and even updated if necessary, although this should rarely need to happen.
For a firm’s clients there should be a deliberate alignment between the investment philosophy and the strategies implemented to achieve the desired outcomes required to meet clients’ objectives and needs. If this is not the case, it may be an indication that a client has been taken on by the firm that does not fit with the firm’s investment philosophy. This in turn may point to an insufficiently robust, clear, and consistently implementable investment process that aligns with a sound investment philosophy, or in other words, a Centralised Investment Proposition (CIP). Importantly, a CIP can either be managed inhouse or in partnership with a specialist investment firm.
What might good look like?
At an advice firm level, a sensible investment philosophy will:
Emphasise the importance of diversification;
Look at returns either projected or achieved in the context of how much risk is/was being taken to achieve that return i.e. risk-adjusted returns;
Not espouse predicting the future but rather preparing as best you can for the uncertainty of the future. Whilst past performance may be important, the future is where we are headed, so avoid driving by looking excessively in the rear-view mirror;
Include a reminder to ignore the short-term noise and the financial media’s attempts to stoke panic and fear in an attempt to attract eyeballs and clicks (and induce ill-judged behaviour);
Remind investors that volatility is an investors friend over the long-term. It is why long-term investors are rewarded and is the reason the expected return of something like global equities is greater than cash deposits;
Highlight the importance of and describe the process supporting systematic and efficient portfolio rebalancing;
Quite possibly incorporate a firm’s stance on sustainable investing and how this approach may reflect in investors’ potential strategies;
Most likely include a view on active vs passive investing. Although in our view a sound process is more important and will stand an investor in better stead than agonising over that perpetual and never- ending debate. There is place for both.
The above is by no means an exhaustive list, but it would be hard to argue that any of these principles are ones that should change or be ignored under any market conditions or client circumstances. They could be taken as somewhat intractable truths to support any sensible long-term investment approach.
The benefits of having one
Having a well-constructed CIP brings with it several benefits. These may include:
greater business efficiency
reduced business risk (especially where there are multiple advisers)
enhancing the value of a well segmented client base (this topic will be covered in an upcoming blog post)
allowing advisers to focus on their core value of collaborating with clients with the aim of developing the most appropriate investment strategy
more optimal client outcomes
In the absence of a sound investment philosophy, it becomes far more difficult to navigate the myriad of options and potential circumstances that the investment journey will bring. The risk lies in advisers and clients being more likely to focus too much on short-term performance which may well lead to knee jerk reactions such the misguided switching of funds, exiting the market at inappropriate times, attempting to time re-entering the market and ultimately damaging the chances of a successful investment outcome. In short, having one can provide further support to good advisers’ endeavours to manage client behaviour through the ups and downs of an investment journey. Having a clearly defined (and documented) CIP will also assist in being able to articulate one’s value add to prospective clients and ensure advisers only work with clients who have expectations aligned with their own.
If you are interested in participating in a series of idea sharing calls where we will discuss the topics contained in this blog post in more detail, where you can share your experiences with peers who are on different stages of their journey as a business, then please register your interest by emailing email@example.com