Implementing an investment philosophy is vital for consistent decision-making across advisers, staff and clients, in turn making the job of the practitioner much easier.
“An investment philosophy explains how you manage clients’ money in simple, mundane terms,” Dimensional Australia executive director Nigel Stewart told the SMSF Association National Conference in Adelaide today.
“It outlines these principles: why you govern the funds the way that you do and it should be based upon your key beliefs of your understanding of how financial markets work and, in addition to that, it should reference what you can control and what you cannot control.
“It’s the intersection of these beliefs and what you can and cannot control is where you should be focusing.”
Stewart said the investment philosophy was effectively a framework or road map.
“It’s designed to enable you to get your clients from point A to point B, and to be able to take all your staff and all the people you work with along on that journey with clarity, understanding and transparency,” he said.
“If you have that framework and you have that road map, you will find it far easier as an adviser, as a practitioner.”
Integral to the investment philosophy was an investment policy statement, he said.
“It’s where you document your investment plan and it provides the guidance which is consistent for informed decision-making of the firm,” he said.
“It identifies conflict and how you deal with that, and it enables you to evaluate and measure the returns – is the return you’re looking for inflation plus 3 per cent or 4 per cent, is it the average of other managers, is it a cash-flow return?
“What’s important to many of your clients, I would argue, would be not the asset allocation, but the outcome to maximise the probability of your client achieving a revenue stream to meet their liability.
“That is what more and more advisers are doing, and we’ve seen that from the Murray inquiry.”
Responding to an audience member’s question in relation to there being too much focus on capital gain and capital loss with equities, but very little attention paid to yields that stocks continued to pay, as well as franking credits, he agreed that at least with SMSFs, advisers could demonstrate control.
“All good advisers will look at franking as a major part of their investment strategy and investment policy, and they will look at yield separately in order to meet this income requirement that they have,” he said.
“That’s a sub-sector to what will be in the investment policy statement.”
He told delegates that when building or improving an investment philosophy, they should ensure it was supported with evidence such as academic research.
“I can’t emphasise that more – you must try and support whatever you do with evidence, particularly if you end up in front of a judge and they’re cross-examining you as to why you put that strategy together and why you recommended that investment,” he said.
An investment philosophy delivered clarity and control over the investment process, he added.
“It ensures that portfolios are constructed and structured around your investment beliefs, and it demonstrates the suitability of that investment for the individual client,” he said.
“It also ensures team consistency. If you have inconsistency in the team – if you’re running an advisory practice and some people are recommending one particular investment and somebody else is recommending another investment – it just doesn’t send the right message to the client.”
