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Why Have an Annual Investment Review?

Regularly reviewing the investments you use in client portfolios can be relevant even for advisors with a passive investment philosophy.

Susan Chesson, MBA, CTP and Helen Modly, CFP, CPWA, 08/14/2014

Active investment managers--no matter their investment philosophy--live and breathe their investment decisions. Tactical allocators, long-short managers--all must evaluate and re-evaluate the composition of their clients' portfolios regularly. But for managers with a passive or evidence-based investment philosophy, what type of investment review is relevant?

At our firm, we manage our clients' assets primarily using asset class funds, and for several of those asset classes, we use institutional mutual funds managed by Dimensional Fund Advisors. Our investment accounts take on no more risk than is deemed necessary, depending on the client's specific financial picture and investment goals.

We promise our clients transparency, liquidity, and broad diversification using inexpensive investment vehicles (mostly institutional mutual fund classes or exchange-traded funds) and tax-sensitive investment management. This is expressed clearly in our Investment Policy Statement, provided to each client, where we outline our philosophy:

--Markets are inherently efficient.
--Exposure to risk factors determines investment returns.
--Diversification reduces portfolio risk and increases expected returns.
--Passive portfolio management is less costly, thus increasing expected returns.

Why should a firm like ours even hold an annual investment review? The advisors are neither chasing alpha through selection of active managers, nor are they tactical allocators, adjusting exposure to various sectors depending on economic forecasts.

But even for advisors like us, an annual investment review is important. The goal is to ensure that you are delivering on your promise to your clients--to build thoughtfully constructed portfolios using the best security selections available.

Your investment committee should have at least three senior advisors. For very small practices, consider drawing in additional members from other firms that utilize a similar investment strategy and process. Assign each advisor the task of presenting on either U.S. equity, international equity, or fixed income. Depending on the software and research available to your firm, you may draw data from several sources--Morningstar, research from ETF and fund companies, comparative analysis from your custodian firms or broker-dealers, and perhaps even interviews with mutual fund portfolio managers.

The investment review process should require each committee member to collect and analyze data on available securities or funds in the assigned asset class, prepare a recommendation for keeping or replacing each security currently in use, and then present to the other committee members. In order to standardize the process, decide in advance what key data on each security should be collected and reviewed, and agree on a standardized format for all members to use.

Susan Chesson joined Focus Wealth Management after a 20-year career in corporate treasury, fixed-income investing, and banking operations. She is a wealth manager and the director of business development. 

Helen Modly, CFP, CPWA, is executive vice president of Focus Wealth Management, a fee-only registered investment advisor in Middleburg, Va. Modly has more than 25 years of experience providing wealth-management services. She is a member of NAPFA and president-elect for the National Capital Area chapter of FPA. She can be reached at info@focus-wealth.com.

The authors are freelance contributors to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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