Most people are familiar with the exquisite level of service associated with the Ritz-Carlton brand. Possibly the most definitive quote to describe that level of service is: “You can defend your price, or explain your value.” Most that have experienced the Ritz Carlton experience would agree with me that they don’t need to defend their price because the value speaks for itself. However, many investors probably don’t realized how under-served they are when it comes to the review of their portfolio. That is to say: what are you truly paying for when you pay asset management fees, commissions, or mutual fund loads? Can it be quantified? It may not be the most comfortable topic to discuss with your financial advisor, but after all he or she works for you, right?
Let’s cover some of the most likely components of the portfolio review process. (By no means is the following an all-inclusive list, however I feel they should be covered at a minimum.)
- What is portfolio policy?
The investment policy statement (IPS) should have been written prior to your first deposit. (Check my previous posts on developing this crucial component). There can never be enough written on the topic of investment performance, so I will not try to accomplish that goal here. Suffice it to say, your standard for performance should be as it relates to your individual investment policy and investment goals, not the broad market. Unless your goal is just to beat the market (which it rarely is). That is to say your questions should be framed like the following:
“As it relates to my overall return objective, how has my portfolio performed?”
“As it relates to my overall risk objective, has my portfolio experienced more or less than I expected?”
The same exercise should be done with the other aspects of your IPS like taxes, liquidity provisions and asset allocation.
Note: Other things included in the IPS would be the frequency of portfolio reviews, and whether your portfolio will be managed with or without discretion, etc. Needless to say, you need to spend some time on this part making sure it is done correctly.
2. What market expectations does your manager(s) have?
Developing capital market expectations is a big part of your investment manager’s job. Will equities outperform fixed income? How will alternative asset classes like commodities and real estate perform? What effect will interest rate policy have on the assets in your portfolio? Is the current economic environment sustainable or is there a significant probability of slowdown? All these questions and more guide the way your portfolio is constructed and positioned to achieve your investment goals. Further, these should be part of the portfolio review discussion (to the extent you permit it).
3. Why has my portfolio performed the way it has?
This can be a touchy subject. Why? Because it introduces the “luck or skill” argument when it comes to portfolio performance. Here’s the quick and dirty version: if your financial advisor manages to a benchmark it is rather easy to see how much “extra” return was added by having them control portfolio decisions. The difference between what your portfolio actually returned and what the benchmark returned is called “active return”. Obviously the benefits of having a manager control the portfolio decisions is to have positive active return. Otherwise you could have just purchased the investment that mimicked the benchmark. (Note: Consider that once transaction costs, management fees and taxes are included, this may be true.) My point is that you should be able to quantify the “active return” your manager is delivering to your portfolio.
4. The X-Factor
I call the X-factor all the stuff you really cannot quantify. It is how you feel during an office visit or when you call and hear a person on the other end of the phone. Do you feel reassured or more nervous after you talk with you advisor? (Hint: You should feel reassured!!) One of the greatest things about what I do as an investment consultant is the comfort I give clients that their plan is working. And further, if there are adjustments that need to be made, then we will make them before it results in a detriment to the portfolio.
It is true that a subset of this list may be enough in and of itself for a lot of investors. However, in today’s world of greater overall transparency including advisory fee disclosure and cost efficiency, advisors have to rise to the occasion to deliver the best client experience–a Ritz Carlton one!