One thing investors rarely ever ask but should is “how do you select the managers you use and why?” Being independent, I have a multitude of options to choose from when selecting investments, which allows me to truly customize a portfolio to a client’s specific needs. The hard part is knowing many products well enough to make an educated recommendation. So how do I go about the process?
1. Success rate vs. peers/benchmark: One of the first things I ask a manager is “Who do you think your benchmark is?” One way to potentially make your fund look great is in the benchmark. A benchmark is just that, something used to measure your performance relative to and also against your peers. Where it gets tricky is when a manager has no exact benchmark or multiple potential benchmarks. In those cases, the manager chooses what they think is the most appropriate benchmark. If, as a manager, I have several options or not an exact one, I may be inclined to pick the “most favorable” option. The one that makes my investment look the best! My job is to try to decide if the benchmark a manager uses is really the one that they should be comparing their investment to. Picking one that’s easy to beat makes you look great, but if it’s incorrect, then it’s a useless measure of performance. The investment may actually be performing poorly as opposed to really well.
2. Management tenure: Nothing against younger managers, but I want to know if a manager has managed successfully in both good and bad markets. The longer you’re a manager, the more market ups and down you may have seen.
3. Commitment to low cost: “Price is only an issue in the absence of value” — Stephen Giulietti (VP, Wealth Management at Smith Barney, Boston) is one of my favorite quotes. Along with “you get what you pay for.” That said, is a manager mindful of expenses? Are they tax aware? A manager needs to remember that when an investor earns money in interest or saves it in fees or taxes, it all equals more money in the investors pocket. This in turn makes for potentially better performance and happier clients.
4. Morningstar Stewardship Grade: Does the parent company have a reputation for being a good steward of your money? It’s important to know that the company is reputable and has a long track record or a philosophy that really values the stewardship of your money.
5. Does the current allocation make sense? This one can be quite subjective, but it’s one I place the most value on. When a manager allocates a portfolio between different asset classes, I always ask myself the question “Does this allocation make sense to me?” Granted, I can certainly be wrong in my thinking, but there is usually a basic logic that can be followed. I always make sure that the manager can explain why they chose a particular allocation and that I can follow and agree with that logic. There have been plenty of instances where I might really like a manager, but I can’t follow the logic as to why they think the portfolio should be allocated the way it is. If I still don’t agree, even after further explanation, then I can’t put the client’s money there.
Regardless of the way you evaluate a manager, just make sure you have a real, repeatable process for doing it, and most importantly don’t compromise that process.
T. Eric Reich, CIMA, CFP, CLU, ChFC is president and founder of Reich Asset Management and can be reached at 609-486-5073 or firstname.lastname@example.org.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.