I spend most of my time doing research on portfolio-management firms. The first time my partners and I meet with a money manager, one of the first things we ask is for the manager to articulate the firm’s investment philosophy. Thinking about this recently, it occurred to me that I’ve rarely heard financial advi-sors talk about their investment philosophy, let alone seen anything in writing. But there are good reasons to do so.
An investment philosophy is a belief system, with respect to investing, that outlines the reasons behind a chosen investment approach or style. I’ve been surprised at the number of times I’ve clicked on a “philosophy” link on a portfolio manager’s website and found nothing more than a description of the firm’s investment approach or process. In other words, firms discuss the “how” without any mention of the “why.”
Everything a firm or advisor does should flow from the stated philosophy. Some portfolio managers have philosophies as simple as believing that, for example, “valuation has a major impact on long-term returns; securities boasting low valuation characteristics generate superior returns over time.”
The philosophy is simply the articulation and documentation of a firm’s belief system, which then guides the investment process that is followed with clients and in all investment decisions.
Even though many advisors continue to advise their clients without the use of an investment policy statement or written proposal, all advisors know they should use some kind of format for documenting client advice. And all advisors can recite the benefits of using an IPS, whether they use one or not.
So, think of your investment philosophy as a broad, high-level IPS for your practice.
A client’s IPS is a statement of objectives and constraints, and it sets out an agreed-upon strategy for achieving stated goals. When markets soar through the roof or crash through the floor, the IPS can be a grounding force to help avoid emotion-driven investment decisions in response to market behaviour.
Similarly, when financial markets are exhibiting bipolar tendencies, any action you want to take should be evaluated, not only in the context of each client’s objectives and constraints but also in the context of your investment philosophy.
Accordingly, your investment philosophy should be part of the discussion when: looking at new products; asked by clients about specific investment products; or whenever you get the urge to shake things up and start doing something different.
Your investment philosophy needn’t be elaborate or complicated; perhaps, just a few paragraphs. I’m not suggesting that you create something new. For most advisors, I’m simply suggesting formalizing — in writing — a set of beliefs you’ve had for many years. Unlike an IPS, a philosophy need only be created once and tweaked very occasionally, if at all. IE
Dan Hallett, CFA, CFP, is director, asset management, for Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for advisors, affluent families and institutions.