Sometimes it seems that there are a dizzying array of ways to invest or manage money. Add in the long list of confusing terms and it is not surprising that many people are confused and sometimes paralyzed by fear of making a bad decision.
There are several ways to manage money, and there is no single solution or strategy that fits everyone.
Below is a progressive break down of decision that will help you easily determine which approach might work for you.
Decision #1: The 2 Ways to Invest
There are two fundamental ways to invest: to do it yourself or get help.
DIY Investing: Some people believe they are the only ones that can provide the attention needed to manage their investments. This is a valid approach and there are many resources available for those who choose this direction. There are investment training courses online to get the needed education, as well as information that may be provided through an employer's retirement plan. DIY management requires continual decisions on what, when, where, and how to invest. You can choose to spend as much or as little time as you want, and your results may not always correlate to your time, energy, and effort.
Getting Help with Investments enlists the help of someone else. In view of the volatility of the last 15 years, more and more people have decided that they are comfortable having someone help them with their investments. While there are no guarantees, numerous studies have generally shown that a large majority can significantly improve overall investment performance with the help of a trusted investment counselor.
Which option is best for YOU?
- If you choose Do It Yourself, you will be faced with a continuous series of investment decisions.
- If you choose Get Help, you will face a different set of questions.
The scope of this article continues with the decisions entailed with Getting Help.
Decision #2: The 2 Ways to Get Help
While there may appear to be many choices, the ways to get help can be summed up with another 2-option choice. You can get help from a Broker or Registered Rep, or you can get help from an Investment Advisor / Representative.
Broker / Registered Rep - This person works for a broker/dealer and primarily sells investment products like stocks, bonds, mutual funds, or variable annuities. They earn a commission for each transaction. The law requires that transactions meet the Suitability Standard; what they sell must be suitable for your criteria such as age, objective, risk tolerance, and goals.
Investment Advisor Representative - This person works with a Registered Investment Advisor and normally provides investment services for an annual fee on managed assets. This securities license requires the Fiduciary Standard, which means services must always be in the best interest of the client.
If the terms Suitability and Fiduciary sound familiar, it may be because the financial industry is currently engaged in a raging debate about the two standards, and the Department of Labor has proposed a rule requiring retirement advice to be given on a fiduciary basis. As with all political issues, money has flowed in from companies and special interest groups to influence legislators.
While the fiduciary standard doesn't guarantee improved services for clients, it is almost universally accepted that clients would benefit if advisors always had to do what was in their best interest. [This is not to say that some brokers and reps are not individually committed to providing great service to their clients.]
Which option is best for YOU?
- Would you rather work with someone who may have an incentive to receive a higher commission from a variety of suitable products?
- Or would you prefer someone whose license requires them to do what is in your best interest and has a direct incentive to help you preserve and grow your investments?
If you choose to work with the second or fiduciary option, then there is another set of options to consider.
Decision #3: The 2 Investment Advisor Representative Platforms
Investments advisors work from two fundamentally different platforms.
Individual Investment Advisor Platform: By license, each investment advisor representative has the authority to provide individual investment services. Traditionally, an advisor personally or a firm has selected and managed the individual investments that underlie a portfolio. This approach means that the advisor has two primary functions:
- Managing assets (usually with a dominant or preferred investment strategy)
- Managing client relationships
Serving these dual roles means that the expertise, effort, time, and energy required to both manage money AND client relationships may compete with each other. There is an inherent potential for either of the primary functions to suffer from lack of attention.
Diversified Professional Money Management Platform: The alternative to the "all in one" approach is to completely separate the two roles of managing money and managing the client relationship. Here, one group of investment advisors focuses fully on selecting, monitoring, and managing the assets. A completely separate group concentrates on servicing existing and new clients.
The two groups work independently of each other and have a clear focus. The money manager focuses on the best possible investment results. The relationship manager focuses on managing the best investment solution for the client, with the advantage of being fully independent to select from a variety of strategies. Another way to think of this approach is the manager of investment managers.
Which option is best for YOU?
Again, there is no absolute answer, but you need to ask which approach you generally feel that is best for you.
- Individual Advisor
- Has basically one way to manage money
- Attempts to balance two critical roles of asset management and client relationship
- Diversified Money Manager Approach
- Investment Advisor Representative understands and implements objectives with total freedom to monitor, select, and adjust your portfolio with a diversified lineup of professional money managers
- Individual money managers are exclusively focused on delivering the best possible results within their style and strategy.
Decision #4: The 2 Investment Advisor strategies
If you have read this far, you have apparently decided the following:
- You want help with your investments
- An investment advisor representative will likely best serve your needs
- A diversified money manager platform gives you the flexibility you desire.
If this is the case, there is one final step to developing the right investment strategy. We will build off of two premises:
- A mutual fund or sub-account of a variable annuity normally has a specific or finite group of investment options
- A core advantage of an investment advisor platform is access to a wide and diversified range of asset classes.
This range of asset classes available to investment advisors can be structured in two ways:
Strategic Asset Management, which has the following general characteristics:
- Employs the generally accepted diversification of equities (various stocks) and fixed income (various bonds) to achieve a traditional allocation.
- Diversification is based on a risk tolerance and allocated between two primary asset classes of equities and fixed income. This allocation remains relatively constant and is rebalanced periodically.
- The structure of the strategic approach proposes that:
- Long term performance is achieved with somewhat static asset allocation and participates in ALL positive performance activity.
- Participation in increased volatility and negative performance will also be experienced.
- The strategic approach is generally better for:
- Periods of general upward trending performance
- Investors primary focused on asset accumulation and comfortable with periods of volatility and negative performance.
Tactical Asset Management, which benefits from the inherit flexibility of an investment advisor platform, but also takes advantage of additional flexibility to access more asset classes, including hard assets and cash and treasuries. Tactical Asset Management has these general characteristics:
- Broader asset allocation beyond traditional equity and fixed income
- Diversification based on desired risk tolerance, with more potential to move among asset classes, e.g. repositioning to better performing asset classes or the safety of cash and its equivalents. Movement is based on the manager's evaluation of the potential performance or indications of high volatility or negative performance.
- Thus, Tactical Asset Management proposes the following:
- Long term performance is best achieved by mitigating the impact of protracted periods of negative performance
- Try to avoid the major portions of negative performance and participate as much as possible in positive performance
- Tactical Asset Management is best suited for:
- Periods of high volatility and generally negative performance
- Investors seeking to preserve capital, distribute income, and lessen the negative impact of volatility
Selecting Strategic or Tactical may change over time or be used simultaneously in varying degrees. The key is selecting an investment advisor who has the flexibility to choose from a well diversified lineup of both Strategic and Tactical professional money managers.
Were you able to understand and evaluate the following decisions?
- Do It Yourself or Get Help
- Use a Broker/Registered Rep or an Investment Advisor Representative
- Use an Individual Investment Platform or one with Diversified Professional Money Managers
- Use Strategic Asset Management or Tactical Asset Management (not so much a matter of which, but when to employ either strategy)
If so, then you have hopefully determined How to Invest Your Money.
If you would like to learn more about Tactical Asset Management using a team of diversified professional money managers, we look forward to speaking with you and providing a complimentary review of your portfolio.