In every aspect of wealth management, it is important to maintain the right perspective or lens, that you are viewing information through.
I was at a presentation recently that was hosted by an insolvency practitioner. In his introduction, he referred to a recent file that he considered to be a ‘good administration’. This gave me pause for thought, what is a good administration?
- Did the business successfully trade out of administration?
- Did the employees all keep their jobs?
- Did the creditors all get paid 100 cents in the $
- Did the practitioner receive all his fees?
Whilst the ‘perfect’ administration would be one where all the above occurred, it is far more likely that only some, possibly one or even none of the above were to occur. So, the concept of a ‘good’ administration would depend on which of the above occurred and which party to the transaction you were. If the creditors and administrators got paid, they would consider that a good result whereas the businessperson who lost it all and the employees without jobs, not so much.
How does this relate to wealth management? Let us ponder the following questions:
- What is a good investment?
- Who is a good investment manager?
- What is a good fee structure?
All the above depends on your perspective. Are you investing for the short or long term? What is your risk appetite and return expectation? What are your liquidity needs? What service do you expect?
Is a ‘good investment’ one:
- With a high return
- That has good liquidity
- Has low risk
- That provides diversification
Once again, the perfect investment would be all the above, realistically, that is not the case. Each of the above also has its own layers of perspective. Cash, Fixed Income, Equities, Property and Alternatives all exhibit different characteristics within each of those areas. To simply compare one to the other with the absence of perspective is flawed. It would be like comparing a delivery van with a sports car, they are designed to do different things, they have different cost structures (both upfront and ongoing), different life cycles and different end values.
What about investment managers?
- Boutique or large corporate?
- Product or portfolio?
- Asset specific or across multiple asset classes?
- Fixed service model (you get what they offer) or flexible and adaptive (they consider your needs and wants)?
- Old and wise or young and hungry?
I am yet to find the perfect investment manager however I do know a lot of good ones. Again, it is a matter of perspective, are you simply looking for market-based returns with low cost, low complexity, and low day to day engagement (an ETF is best for you) or do you want daily contact and to be engaged in every decision-making process (a series boutique managers across asset classes may be appropriate).
Then we get to the sensitive (for all sides) topic of fees. Should you consider:
- Gross fees charged or after fee returns?
- Whether %age of the fee to return is relevant?
- Retainer, funds under management (FUM) and or performance fees?
- Independent to return or aligned to results?
A manager on retainer is paid to do the job, regardless of how much you invest and regardless of performance. This provides a level of independence however carries the risk of lazy management.
FUM and performance fees may be perceived as aligning the scale and interests of the manager to the client however it inhibits independence (it is in the manager’s interest to recommend further investment in their own product or service) and may encourage taking risks to earn a higher return (the more you earn, the more they get paid). Performance fees then carry the challenge of setting an appropriate benchmark, this is a whole other topic for another day.
To consider any of the above in isolation or make direct comparatives between individual investments, managers and fee structures is fraught with danger and may lead to poor investment decisions.
That is not to say that there is no value in comparing 2 or more mid-cap Aussie equities managers against each other or considering the yield to maturity and investment-grade of a variety of fixed income portfolios, this is the very application of perspective.
It is important to maintain perspective around what you are wanting to achieve, what you are investing in, who you are investing with and how much it costs. Such perspective is specific to your own situation, wants and needs.