An advisor recently told me, “I really only focus on one consideration when choosing investments for my clients: their investment experience needs to match their expectations.” If he can accomplish that, the advisor explained—no matter the client’s objective or whether the portfolio beats its benchmark—he has done his job.
Following this advisor’s lead, one approach to creating more predictable client outcomes might be to spend less time on screening mutual funds and more time educating clients on what to expect. For advisors who are trying to simplify their practices and enhance the client experience, partnering with an established investment strategist is an increasingly popular option.
Why Work With a Strategist?
Choosing the right strategist can create leverage by:
- Minimizing the effort required to screen individual underlying investments
- Providing a demonstrable track record, ideally through a full market cycle—to help identify how portfolios could react to different market environments
- Freeing up time for other client-focused activities, such as education or comprehensive financial planning
Because there isn’t a widely available centralized database for strategists (like Morningstar), many advisors develop a pool of candidates based on peer recommendations or by researching providers. Once you’ve identified a few potential options, the due diligence phase can begin.
How to Choose a Strategist
At this point, you’ve presumably done some basic investment due diligence on multiple strategists to create a short list of contenders. Before doing the deep dive into their investment methodology, it may make sense to turn the due diligence process upside down and approach it from a top-down perspective.
Start with a thorough scrub of the firm itself. If you’re affiliated with a larger practice, a dedicated due diligence team may do this on your behalf and provide you with summary documents. If you own the due diligence process yourself, you should develop a formal system that has two parts: firm-level and product-level (investment-focused) due diligence. Here are some high-level noninvestment considerations that are often overlooked:
1) General firm Information