Our Process is comprised of several different steps
Our first step involves getting to know each family members unique situation as completely as possible. We often meet with every family member, ask lots of questions (via checklists, questionnaires, teleconferences, surveys, and face-to-face interviews) that give us an all-inclusive view of each family's entire financial picture. We often create personal balance sheets, income & expense statements, a detailed list of all investments, where they are held, and why. The ownership structure and the titling of each asset, trust, account, and why. Their short and long term financial goals, desires, liquidity requirements, time horizons, philanthropic wishes, necessary expenses vs luxury expenses, as well as any special circumstances that we should know about. This discovery process typically takes several weeks. We believe that the better we can understand each family member, the easier it will be for us to develop a financial plan, portfolio and an investment strategy to match the clients personality and achieve all of their objectives.
2. Quantify financial goals and desires:
Our second step is to figure out the answers to the following questions: What’s your family's (and each family members) total net worth? Liquid net worth? How much money do you earn and spend each year? How much money will you (or your children) need to retire comfortably, and why? At what age can you (or your children) retire comfortably? What annual rate of return will you need to achieve to reach all of your financial goals? What annual rate of return do you desire to achieve? How much money would you like to leave to charity? Other goals and the time horizons needed to reach them. As well as many other important questions.
3. Risk tolerance determination:
Based on several interviews, surveys, questionnaires, client experiences, knowledge, temperament, past behavior and biases, we determine how much risk the client has the ability, willingness and need to take on to comfortably achieve all of their financial objectives.
After collecting and analyzing all of the above data, we carefully design & create a well thought out investment policy report (financial plan), which details the clients financial goals, required rates of returns, risk tolerance levels, time horizons, target savings & spending rates, asset allocation breakdowns; what percentage of the portfolio should be invested in large cap US Equities vs small cap vs foreign vs bonds, cash, real estate, commodities, etc. As well as which firm(s) each asset should be held at, the optimal titling of each account, whether or not the asset should be held inside or outside of qualified retirement accounts, Trusts, 529 college savings plans, custodial accounts, Roth IRAs, etc. The financial plan shall also address rebalancing and tax harvesting procedures and strategies, time frames, minimum & maximum threshold exposures, contribution & distribution objectives, expected returns, tax issues, life insurance, philanthropy, and so on. The plan provides valuable information along with a financial road map for each family to follow with a high probability of allowing each client to reach their financial goals.
If necessary, we correspond with the family's other professional advisors such as attorneys, accountants, insurance agents, bankers and brokers to make sure that their financial plan makes economic sense on all fronts and that there is no duplication of efforts.
We continually monitor and evaluate approximately 60 different global asset classes and generally incorporate between 10-20 distinct asset classes into each family member’s portfolio. Each asset class usually has several compelling choices of low cost institutional share class mutual funds and Exchange Traded Funds (ETFs) that meet our stringent investment criteria. Each underlying fund that we recommend generally owns hundreds (and sometimes thousands) of different securities (equities, bonds, commodities, currencies, etc) to give our clients the most globally diversified exposure to each asset class that we deem to be appropriate. When determining which asset classes to overweight, underweight or eliminate, we analyze market conditions, expected risk & return data, historical correlations, as well as each family member’s investment goals, time horizons, and their unique ability, willingness and need to take on financial risks. Knowing which investments to buy, sell and hold is just one small piece of the investment puzzle. Knowing where to hold each asset, the proper titling of each account, how and when to execute the trades, where and whom to trade with, what types of orders to use, and at what prices to trade at, is another very important piece of the investment equation that we typically handle for our clients.
7. Monitor & rebalance:
We normally monitor each client’s accounts on a daily basis and evaluate whether their actual asset allocations matches up to their target allocations. When we feel that the actual asset class weightings are approaching a client’s minimum or maximum target threshold levels, we will take appropriate actions by gradually buying or selling securities to bring our client’s actual weightings within an acceptable range of their target weightings. We call this process strategic (or dynamic) rebalancing as it forces us to be very disciplined and increase our clients exposure to lower valued asset classes (by buying more low) and decrease our clients exposure to their higher valued asset classes by gradually selling some assets after they’ve gone up in value and could presumable be considered overvalued.
There is no guarantee that the asset classes that have recently gone down substantially (that we may consider to be undervalued or out of favor) will eventually move higher, or that the asset classes that have recently gone up substantially (that we might consider to be in favor or overvalued) will eventually go lower. But we do strongly believe in reversion to the mean, and that asset classes tend to overshoot in both directions, and that valuations do matter. In general, the higher the valuation, the lower the future expected returns, and the lower the valuation, the higher the future expected returns. Unfortunately many investors (most of whom have mediocre results) buy after very good periods, when valuations are inflated (and expected returns low) and they sell after (or during) very bad periods, when valuations are low (and expected returns are high). We believe that selling when expected future returns are high and buying when they are low is not a prudent long-term strategy. Therefore, we typically (and gradually) add to our positions after they’ve gone down a lot, and systematically sell small portions of our positions after they’ve gone up a lot. We’re also extremely tax sensitive, especially inside our clients taxable accounts, therefore we will tax manage (harvest losses or accelerate gains) whenever necessary.
We typically meet face to face with each client annually, and sometimes quarterly to review their overall financial plan and determine if their asset allocation percentages and investment mix is still appropriate for their goals which sometimes change. We help each client stick to their investment plan especially during difficult times. The only time we may recommend altering it, is if their financial circumstances have changed dramatically typically due to a major unexpected life changing event (such as a death, divorce, sale of a business, inheritance, bankruptcy, etc). By following a very disciplined investment strategy, clients will be better mentally prepared for the potential big swings in their portfolios that typically happen when they least expect it.