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Three classic investment rules.


Common investor complaints can be service, advice or performance related but they are always related to three classic rules.

Compensation drives advisor behavior. It can impact objectivity and the suitability of recommendations. Advisors rewarded by transactions or product-based commissions and trailers may not necessarily work for their client. (May not. As always, the unethical behaviors of the few taint the reputations of the many). This is why many investors end up with a collection of products instead of a portfolio. There is a difference between brokering the product du jour and constructing a portfolio that addresses investor requirements.

Investors understand the importance of impartial investment decision making in reaching their financial objectives. To ensure alignment of advisor interests with their own, investors should seek fee transparency and full disclosure. ‘How are you paid?’ is a good question.

Clients benefit from planning. Comprehensive financial planning, investment planning and then portfolio management. In that order.

The purpose of Financial planning is to identify client objectives or ‘life goals’. Typically, these revolve around investor Retirement, Tax, Risk Management (Insurance), and Succession and Estate issues.

Investment planning is next. Why? Investments should have the aim of achieving a life goal. (Otherwise, why are you investing?) Investment planning establishes guidelines that are appropriate to the realities of the investor (derived from financial planning) and of the markets. The investors required rate of return is balanced against their constraints – risk tolerance, time horizon, liquidity and tax needs and preferences. This is the starting point – client specific asset allocation – for portfolio management.

Portfolio management then, is the implementation of the investment plan. Portfolio management adds value around the asset allocation (established in the investment plan). Allocations are adjusted – in small increments – to ensure exposure to economic growth opportunities depending on over or under valuation.

This balancing act, within ranges for each asset class, makes the investor’s portfolio more predictable. No wild swings. Rather, slight adjustments to add or reduce exposures, ensure the portfolio progresses toward client objectives.

To much of the investor’s money management budget is spent buying products. Too little is spent planning.

Investor requirements (from financial planning) drive any strategy and any strategy must revolve around asset allocation and diversification. Regardless of the advisor. Asset allocation is the single most important decision in investment management (and perhaps the least understood). And diversification ensures participation in broad market opportunities for returns with less overall portfolio volatility. Something will always do better than a broadly diversified portfolio – but not without more risk.

Compensation, Planning and Asset Diversification are all controllable. Markets are not.

Originally published in the Business Thompson Okanagan news, April 2008.

Doug Cronk CFA is Manager, Investments for a Canadian Pension Fund.

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