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So, What Do You Do?

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I was standing in the stockbroker’s office when a prospect walked in with a $50,000 check. The prospect said, “I want to invest this money. If I invest with you, what will you do with the money?” The broker said, “Well, I’ll put it in the stock market. Then I’ll trade the stocks and see what I can do.”

I almost burst out laughing–I thought this was one of the worst sales presentations I had ever heard. I nearly fell over when the prospect said, “Okay, that sounds good,” and handed the broker his check.

That was more than 15 years ago. Today, investors are more sophisticated, and you need a more sophisticated answer to the question, “If I invest with you, what will you do with my money?”

I’m going to outline a 10-step investment management process that you can use “as is” or modify to fit your own situation. Then when people ask, “If I invest with you, what will you do with my money?” you can say, “I’m glad you asked. We use a multi-step process to maximize our clients’ success. Would you like me to explain it?” Defining exactly what your investment process is will improve your marketing communications and increase the number of people who hire you to manage their money.

Investment advice should combine the high-tech processes of institutional investment management with the high-touch counseling skills used in personal financial planning. My 10-step process draws from institutional money management, prudent investor rules, the financial planning process, coaching, and consulting.

Understand Securities Markets

The first step as an investment advisor is to acquire knowledge that has value in the marketplace. You must have specialized knowledge that investors are willing to pay for. In the past, much of the training for financial advisors was based around selling products, but to be truly a competent investment advisor, you need to understand how professionals select stocks, allocate assets to different classes, and minimize taxes and costs. Most importantly, you must know how professionals make money in the markets. The body of knowledge about professional investment management is commonly referred to as “modern portfolio theory.” Without this critical knowledge, you may simply be charging your clients to help them buy high and sell low. Two designations that testify to your specialized knowledge in investing are the Certified Investment Management Consultant (CIMC) and the Chartered Financial Analyst (CFA).

Clarify What Your Clients Want

Financial advisors who focus too much on the investment process often miss their real task, which is to design an investment plan that matches each investor’s individual hopes, dreams, goals, and fears to the realities of the securities markets. Advisors must have an effective and consistent process for discovering and clarifying the “soft data” that really drives human behavior. The focus of the retail business is not just managing assets for maximum return, it is also managing assets in such a way as to maintain the clients’ sense of security and peace of mind.

Document the Current Situation

Once you know what your clients value and where they want to go, you need to document where they are now. When most financial advisors talk about gathering data, it is this “hard data” they are talking about–the client’s income, expenses, current assets and allocations, liabilities, etc. Many advisors jump immediately to this step before identifying what their clients really want to accomplish, but you shouldn’t skip the critical information exchange in step two.

Most advisors use a form to gather the hard data that so it can be entered into one or more software programs to document and analyze their clients’ current situation. Many advisors I work with also use this information to analyze past performance, plot where the portfolio falls on the efficient frontier, evaluate past taxes and costs, and determine any overlap in the diversification of existing assets. They also analyze potential tax liabilities and commission costs to determine the cost of repositioning assets.

Write an Investment Plan

A written investment plan is the primary thing that distinguishes a professional advisor from a product salesperson.

Most financial advisors use a software program to help them determine the ideal asset allocation for their client. The plan should also document the client’s financial goals as well as permitted and prohibited securities and strategies. When markets turn rocky, it is this written plan that empowers you to keep your clients on track toward achieving their long-term goals. When a client comes to you during a difficult market, like today, and wants to change his allocation or bail out of the market, you can pull out his plan and review it with him. You can say (tactfully, of course), “According to our written investment plan, your time horizon is a minimum of 10 years. We expected the markets to be volatile and factored these ups and downs into our investment strategy. We know that to reduce risk, our best strategy is to stay invested. This plan has the highest probability of long-term success with the lowest risk possible. Nothing has changed in the way markets behave or in what strategies we believe to work. Has there been a change in your personal situation that makes you want to deviate from your plan?”

The plan helps keep clients from reacting to short-term market fluctuations. Without a written plan, financial advisors run the risk of letting their clients’ emotions drive their investment decisions.

Determine Appropriate Form of Ownership

Part of offering comprehensive investment advice is to ensure your clients are holding title to their various assets in the most advantageous manner possible. You may need to help your clients set up a living trust, an irrevocable life insurance trust, or make sure they have the correct ownership structure for their business entities or privately held investments. This non-investment area can be critical in minimizing taxes, liabilities, and risks from non-investment-related activities.

A close relationship with a business and estate planning attorney is critical for setting up appropriate trusts, corporations, and other entities to ensure proper ownership.

Select Investment Managers and Asset Classes

Most financial advisors spend a fair amount of time evaluating different investment managers. Once you have selected the managers that you want to use, you need to select the specific investments and asset classes appropriate for your client and their level of risk.

Today you can select from a huge universe of individual securities, mutual funds, wrap accounts, separately managed accounts, hedge funds, and other alternative investments. Keep your stable of managers small so you can track their results and management changes, and so you can tell their story to your clients. Asset classes are commonly packaged as mutual funds, and these become the building blocks of your investment portfolios.

Reposition Assets

Once you have selected the investment managers, and chosen specific asset classes or securities, it’s time to actually implement the plan and restructure your client’s investments from where they are to where they should be. During this process you need to be sensitive to your client’s tax issues and strive to minimize taxes and other costs.

Monitor Performance

When monitoring portfolios, keep in mind that you are not going to change managers simply because their funds are going down, which you may have anticipated they would do in certain market situations. You will change managers when they fail to perform as you had expected them to in your written plan. Style shift is a more legitimate reason to change managers than current performance.

Rebalance As NeededBecause you have specific written goals, you can make informed decisions about when to make changes and what changes to make. Usually you will not rebalance portfolios unless there is a significant deviation from your desired asset allocations.

Approximately once a quarter, you need to reevaluate each portfolio and determine if it makes sense, on an after-tax basis, to change managers, to rebalance, or to make no changes. Often the best decision is not to do anything.

Educate Your Clients

You can be the world’s greatest investment advisor, but your clients will sabotage you if they don’t understand how to invest successfully. In the first two years, it is important to meet with your clients quarterly to educate them about how markets move and how professional investors make money in the markets. You don’t need to educate your clients to become professional investment advisors. This would be like your car mechanic teaching you to change the oil in your car yourself. Clients don’t want to do it themselves, but they need to have a basic understanding about what it is that they’re paying you to do for them.

Your investment management process may involve more or fewer steps than the one outlined above, but what’s important is not the details–it’s that you have a systematic, definable way of managing money that you stick with. That way, when people ask you, “If I give you my money, what will you do with it?” you can tell them–clearly, and in detail.


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