Investment Guidelines
Establishment of Investment Guidelines
Do you have investment guidelines?
If so, do you understand the risks associated with your current investment guidelines?
How are investment guidelines used?
Your investment advisors construct your portfolio from the instructions you give them in your investment guidelines. As such, investors need to carefully understand the consequences of what they are permitting and restricting from their portfolio via their investment guidelines.
What is risk tolerance?
Every investor portfolio has its own appetite for risk. Only you can decide the magnitude of losses you are willing to tolerate in your portfolio. Of course, typically, lower risk portfolios are associated with lower expected returns. So investors must choose how much potential losses they are willing to tolerate versus how much expected return they hope to make.
Understanding your investment guidelines
After our review of the guidelines you have provided your investment advisor, you will have a better understanding of the level of risk inherent in permissible portfolios.
Taking control of your investment guidelines
Understanding your investment guidelines is the first step of taking control of your portfolio and making sure your money is managed according to your desires.
Adhering to your investment guidelines
Who checks to make sure your investment guidelines are being followed?
Financial Advisor Disclosures
How much do you know about your financial advisor?
Beyond the profit and losses of the advisor and the firm is the integrity of the individual and the establishment. Our monitoring begins with a review of the mandatory disclosures of the financial advisor and the firm. Our findings have ranged from the criminal, "Manufacture/Sell/Dispense/Distribute LSD," to a history of as many as 9 customer disputes.
How much do you know about the firm managing your investments?
Through firm disclosures, clients can learn about other firm principals and metrics such as the number of other clients and the number of employees. In this way, clients can determine, independently, if the firm is capable of providing the services they expect to receive.
Monitoring Cash Flow
Monitoring Withdrawals
Many entities are shocked to learn years after the fact that money and investments were withdrawn from their account. We monitor withdrawals from monthly statements and promptly notify you of irregularities.
Monitoring Inflows
Many investments have scheduled times of payments. These payments are not always received into the intended account. We monitor accounts to ensure scheduled payments are received.
Monthly Schedule of Cash Flows
Using the scheduled time of payments, a calendar of expected cash flows may be built. The monthly schedule of cash flow may be useful to clients who rely on income.
Commissions and Fees
Markups and Markdowns
Investments may be bought or sold in principal trades. That is, you may sell or purchase your investments directly to or from your financial advisor or their firm. This means your financial advisor may profit by instantaneously reselling/rebuying your investments. These profits are not disclosed to you. In the example to the left, the financial advisor bought a bond at 98.50 from a customer and instantaneously resold it at 100. The client was only informed it had sold the bond at 98.50.
Miscellaneous Fees
We monitor the portfolio and report to you the totality of fees charged to the account.
Trading
How good are the trades allocated to your account?
How do you know your account isn't being used as the placement for erroneous firm transactions? When possible, we monitor the level of your execution versus the level of the average price execution in the market. In the picture to the left, the darker green represents better execution and the darker red represents worse execution. If your trades are always red it may indicate an allocation problem or other trading issues.
Frequency and Cost of Trading vs Potential Benefit of Trading
Since many times financial advisors are compensated via trading commission, the frequency and cost of trading may be compared to the potential benefit of trading.
Risk
What is risk?
Risk can take many forms. Concisely, it is a factor that could cause your portfolio to lose money. One of our goals is to help our clients understand the potential risks to their portfolio and make sure they are comfortable with their reasonable downside exposure.
If you had a "bad year" how much could you reasonably expect to lose?
We explain your risk so that you can make appropriate investment decisions...NOW. Possibly avoiding a loss, by selling before it occurs.
Diversification
Some portfolios, especially trusts and estates, have large core positions and desire to use mutual funds and ETFs to diversify these core holdings. Regardless of how your portfolio was constructed, we drill through mutual funds into their individual stock components and examine how much additional exposure they have to your largest positions and how much diversification they are actually providing. We monitor the overall diversification of the portfolio.
How do individual investments contribute to overall portfolio risk?
By quantifying various portfolio risks we can isolate those investments that most contribute to the risk of the overall portfolio. In association with investment advisors, this information might be used to assist in selling decisions designed to reduce portfolio risk.
Performance
Why should I be concerned about my performance metrics?
Investor losses may have many unique causes. However, in an attempt to hide these losses from investors, many different frauds may be accompanied by similar deceptive performance reporting practices.
Performance is a function of the prices used to value the portfolio. Where do the prices come from?
We independently verify the reasonableness of the prices used to value your portfolio.
Are your portfolio returns accurate?
Some investment managers tout returns that simply aren't true. We verify your portfolio returns.
Is the benchmark reasonable?
Portfolio performance should be compared to a reasonable benchmark. This benchmark should be determined at the beginning of the relationship with the investment manager. We verify the portfolio's benchmark return.
The Overall Result
Having an outside firm monitor your performance on a monthly basis significantly reduces the likelihood that a scheme to defraud your account could go undetected for very long, giving you both added protection and peace of mind.