If not self-evident, nearly so.

If not self-evident, nearly so.                                                                        Image Info


Working with clients

Select Processes based on benefit and certainty

Select processes by benefit and certainty


  • Control the controllable; create measurable client results with reliable and predictable techniques.
  • Start the triage of client care with the most certain & beneficial actions leaving for last measures offering smaller, less certain benefits.
  • A client’s investments are best viewed in light of their “risk capacity” (assets/liabilities.)[i] The client’s investment design becomes a result of identifying that capacity through basic financial planning and budgeting.[ii]










The roles of active and passive investing in retail portfolios 

Tortise and Hare

Active strategies

  • Can improve risk/return profile by consciously managing exposures to discrete risks (e.g., sectors, issuers, liquidity, currency, etc.)
  • Offer the hope of limiting exposure to over-priced securities in over-valued markets, while most benchmarks, blind to valuation, may overexpose investors to overpriced securities, sectors or asset classes.[iii]

Passive strategies

  • Can reduce portfolio expense and improve diversification by delivering specific beta-exposures at low cost.


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Searching for exceptional investment managers


  • Alpha[iv] exists; it is statistically true in any period some managers consistently outperform their benchmark. Those top-performers change over time as asset classes and investment styles move in and out of favor.
  • It is very difficult to hire exceptional investment skill because (i) true ability is rare and hard to predict and (ii) managers have limited capacity and (iii) thousands of other advisors, pensions and endowments compete to hire the same skill.
  • Institutions have many advantages versus retail investors in competing for the best managers; institutions offer large $ mandates, can commit quickly and analyze performance more patiently and methodically. [v]
  • The more relevant question; “What consistent, reliable benefit do retail clients and their advisor gain from emphasizing alpha (selecting out-performing managers)?”
  • Picking exceptional managers, an unpredictable task with uncertain benefit, is by itself unlikely to meet client needs or insure an advisory practice’s success.

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Investing retail clients with an ‘Endowment Model’

Four Boston campuses

  • The “endowment” model of investing is not suitable for any retail client facing the possibility of exhausting assets.
  • The risk tolerance of endowments far exceeds the average person because endowments are perpetuities managing spending over very long time horizons and able to augment assets through campaigns.

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Table Endowment and Retail Investor characteristics







Marketplace paradox that does not make sense to me

Inconvenient truth versus reassuring lie

While clients earn the largest most reliable benefits through “planning”[vi], the retail market is dominated by clients seeking and advisors offering investment advice.






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[i] For a more thorough discussion of risk tolerance and capacity see Michael Kitces/Nerd’s Eye View “Separating Risk Tolerance From Risk Capacity” Article link

[ii] Aspirational investing is appropriate for clients with surplus risk capacity.

[iii]  Not all passive strategies are good investments. Some permit excessive exposures due to issuance/buy-backs or blindness to overpricing. Others simply lose performance; for example stock benchmarks with highly predictable buys and sells are easy targets and lose performance to arbitrageurs.

[iv] “Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index used as a benchmark, since they are often considered to represent the market’s movement as a whole. The excess returns of a fund relative to the return of a benchmark index is the fund’s alpha.” See Investopedia definition

[v] In spite of their advantages, institutions don’t boast a great track record of selecting exceptional managers. Notes Charles D. Ellis, CFA in “The Rise and Fall of Performance Investing” Article link ; ‘Despite considerable time and effort and access to managers’ data, the self-chosen task of the investment consultant firms has proved far more difficult than expected. As a group, selection consultants have caused their clients to underperform by 1.1% of assets, according to Tim Jenkinson, Howard Jones, and Jose Martinez research…’

See also “Picking winners? Investment consultants’ recommendations of fund managers” Article link

[vi] See Michael Kitces’summary Article link. See also the original Morningstar Research by Blanchett and Kaplan Article link.