I’m a strong proponent of a financial advisor formalizing an investment philosophy — that is, creating a written belief system that explains why you invest clients’ money the way you do. This should be part of the discussion when you’re looking at new products, are asked by clients about specific investment products or when you want to start doing something different. Your philosophy should address these areas:

> Portfolio Construction And Asset Allocation. As you probably manage multi-asset class portfolios, articulating your beliefs regarding portfolio construction and asset allocation is critical. Asset allocation is your most important investment decision, and this section of your investment philosophy will form its foundation.

I view portfolio construction as being process-driven. In other words, this part of your philosophy should detail why you follow your chosen process. As an example, at HighView Financial Group, we construct purpose-driven portfolios that match, as closely as possible, investment assets with planned future spending liabilities. We do this because virtually every pool of capital has attached to it some future “spending goal.” Hence, liability-matching drives our construction process.

Asset allocation, however, touches on somewhat different areas. Many clients often “feel” better when you “do something” to get them out of the market before a big plunge and boost exposure before markets zoom higher. This is often referred to as “tactical” asset allocation. Good advisors know their strengths and, more important, their limitations. And for good reason, most advisors aren’t tactical asset allocators.

Although we prefer to let client goals drive asset allocation, market values can push clients away from an otherwise suitable asset mix. Accordingly, we use a rebalancing method that balances the need to keep a suitable asset mix with the flexibility to benefit from financial markets’ long persistent momentum effect. This is also our way of indirectly addressing clients’ desire for more tactical allocation because our methodology has often — but not always — resulted in well-timed rebalancing trades.

> Active vs Passive. At a high level, it may be a good idea to state where you sit on the active/passive argument. Note that you need not necessarily pick sides. Instead, view the topic as a continuum, and flesh out where you stand on this hotly debated issue.

In the case of our firm, we’re indifferent to the two broad approaches because the type of exposure desired and the applicable fees will influence our preference for a passive or active strategy for a particular mandate. This indifference is documented in HighView’s investment philosophy.

> Security Selection. Most advisors have strong views on security-selection styles. Maybe you’re biased toward value, growth, momentum or some blend of these approaches. Whatever the case, state your belief with some justification. The same should be done for fixed-income.

No more than one to three sentences are needed for each component of your investment philosophy. This philosophy may not have an immediate impact on your business, but it should act as a grounding force in tumultuous times and help promote continuity as your practice evolves and grows.  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.