Investment expertise & resources

You do not need the resources of a large financial institution to be able to fund the research needed to support an asset management operation. The amount of resources does depend on the type of investments your advisor uses to allocate your assets.

Direct stock selection requires the most resources. Companies who intend to select stocks in all areas of the domestic market and global market place require the greatest resources.

But companies do not need specific stock selection expertise in all areas providing a) they can allocate to the market component they want at cost through an efficient vehicle and b) they can actually value the market component they want to allocate to.

Those who allocate to market components (small, medium, large, value, growth, income, recovery, special situations, themes and sectors) require a lesser amount of resources since the higher cost of stock selection has been delegated away mutual funds or exchange traded funds.

The most basic requirement of any asset manager is that they can value the markets, the areas of the markets and the securities or funds they are invested in.

If you cannot value, then it is impossible to determine how much you should invest and when and how much you want to sell or buy.
If you cannot value a market then you cannot assess the risks to the ability of assets invested to meet financial needs over time. If you cannot value then you cannot assess the risks to return over time either.
If you cannot value, you cannot buy low or sell high, the most basic ability in the financial services industry.
If you cannot value then you cannot construct a portfolio of investments, nor can you manage risk or return.

Much of the financial service’s industry is organised around the precept that it is asset allocation and not security selection or timing that is the most important component of return.

Unfortunately, if you want to manage risks to the ability of assets to meet financial needs over time, you cannot allocate without being able to value. It is a critical misconception because it has allowed armies of advisors without valuation expertise to deliver portfolios constructed by systems without a valuation component.

Being able to select the best performing mutual funds to provide the portfolio allocation does not constitute investment expertise, nor does it constitute sufficient resources to manage portfolios. A mutual fund or ETF is only an asset allocation vehicle designed to access an area of the market or a market that you want to allocate for valid valuation reasons.

Anyone using mutual funds and exchange traded funds needs to be able to value markets, their components and the underlying economies.

As far as the management of an individual’s financial security is concerned, an organisation needs to be able to provide independent analysis of markets, securities and their risks.

It is difficult for many financial institutions that depend on transactions for their remuneration to take an independent view on the market.

Companies that do not trade stocks or make market in stocks or help bring stocks to market are more likely to be able to provide independent valuation analysis. But even here, true independence is the ability to think independently of the rest of the market in making decisions regarding valuation and risk.

Independent analysis is of critical importance where the advisor or company is charged with the management of both assets and financial needs. Decisions need to be made with respect to these risks to short and long term financial security.

Investors therefore need to ask this one question. What is driving the analysis, the advice and the recommendations they are receiving?

These questions need to be asked in particular where the advisor or company is using third party software, third party research and third party asset management.

Specific expertise is needed to construct, plan and manage portfolios to meet financial needs over time.

At one level, the portfolio needs to be able to provide a balance of risk and return at a point in time, a balance which needs to be personal to the client’s financial needs and risk preferences.
At another level, a portfolio needs to be able to meet financial needs over time, to meet these over time and to manage risk and return at all points in time.
At another level the portfolio needs to take into consideration future inflows (income and capital) to and future outflows (income and capital) from the portfolio within the asset allocation structure, decisions which cannot be made without systems that manage this complexity.

The structure and allocation of the portfolio needs to take into consideration your needs today and your needs tomorrow balancing risk and return at all times.

The only way expertise can be distributed to the client is if the asset allocation and portfolio construction expertise is automated. It is impossible to construct plan and manage personalised portfolios to meet needs over time without a discipline that defines the rules that govern the construction, allocation and management of portfolios to meet financial needs over time. These are investment planning disciplines.