A successful investment management strategy takes a structured and disciplined approach to investing. The entire decision-making process, from constructing a portfolio through the regular monitoring of it, revolves around the client's needs and objectives. Inherent in that process is an uncompromising commitment to excellence, evidenced by quantifiable performance evaluations that are initiated on a timely basis.
The two pillars supporting the performance goals for each client are an investment policy statement and an asset allocation analysis. The investment policy statement is a precise articulation of the client's objectives, distilled from thorough discussions of the client's situation, experience and prospects.
The policy should be made for the long-term, not to time the market. A disciplined policy aligns the investment strategy to meet the client's objectives.
The other cornerstone of a sound investment philosophy emphasizes the use of asset allocation -- a disciplined, long-term financial approach for investing money into various asset classes based on your investment goals, time horizon and risk tolerance. With asset allocation, the investment is spread among various asset classes, such as stocks, bonds and cash. Within these broad categories, there are different types of stocks and bonds, as well as different investment strategies, such as growth and value investment styles.
Once educated, investors enthusiastically embrace the critical importance of active asset allocation as an integral element in accounting for the performance of their investment portfolios. Your investment strategy should be a disciplined process to optimize your portfolio and focus on five areas.
* Financial assessment. This distinctive planning process allows a better understanding of your unique situation as an adviser helps you develop a complete financial profile.
* Defining a goal. This process allows you to identify risk tolerance, income needs, investment horizon and acceptable investment mediums, which will translate into investment objectives.
* Asset allocation. You can evaluate eligible asset classes and develop an optimal asset mix, which can reduce risk and enhance returns.
* Portfolio construction. This begins with the assessment of existing holdings and a review of new opportunities. Adjusting asset allocation will optimize tax efficiency and determine fund investment vehicles.
* Ongoing performance monitoring. This process will assess portfolio performance against appropriate benchmarks. It will confirm your portfolio is still consistent with your goals, objectives and expectations. A rebalancing of your portfolio is done as needed to keep it in line with long-term asset allocation ranges.
As the professional investment manager is challenged by the clients' unique needs, he or she must always focus on investing in pure asset classes and utilize professional capabilities. Professional investment managers tailor portfolios across a range of asset classes using information gleaned from a variety of expert sources. What's more, they provide the best of the best in terms of the availability of pooled funds in each asset class, run by superior managers with strong track records who have carefully avoided style drift.
So what should you look for in an investment manager? Consider the following.
* Proven investment discipline that uses solid asset allocation models to help clients reduce risk and improve investments returns
* Excellent client service
* Sophisticated risk control in the portfolio construction process
* Cost-effective professional management with no conflicts of interest
* Consistent communication between you and your investment manager
Professional investment managers are not market timers, nor are they "hot stock" pickers. Rather, they are investors who deliver excellence through timely client communication and outstanding research and by paying close attention to performance.
They reside in no ivory tower; instead, the client is at the center of the process.
Once an investment policy statement is developed and an appropriate asset allocation is established, the structure and discipline that you and your investment manager continue to implement will result in a successful, long-term relationship.
Joseph Wojcik, CPA, MT, is senior vice president and regional executive for Stark-Summit Counties for Sky Bank. Reach him at (330) 258-2360 from Akron, (330) 498-4623 from Canton.
Though a simple will is an essential start to protecting your assets, additional resources to transfer assets are needed. Your family can be protected from unnecessary taxes by creating an estate plan, which is designed to look at your needs and your overall financial situation and to protect your assets so they can be used for the intentions you wish.
A primary goal of any estate plan is to preserve assets from unnecessary taxes so they can be used in the way you desire. A professional asset manager can assist in developing a plan to avoid unnecessary taxes. The federal estate tax is scheduled to be repealed in 2010; it remains a threat until then. Because of this deadline, the importance of tax planning is being brought to the front burner.
A well-thought-out estate plan will help you avoid the unnecessary taxes that can be placed on a large estate, and your savings could be substantial.
Estate tax laws provide for an unlimited marital deduction when assets pass to a surviving spouse. However, for the surviving spouse's estate, there is no deduction. When he or she dies, the tax cost could be enormous depending on the size of the estate. This potential tax cost could be eliminated or reduced by setting up planned trusts under your will.
The services of a professional asset manager are important during the settlement of your estate. You want someone who is experienced in matters of distribution and investments and who will execute your plan under the directions you established. Preserving your estate is an important role of the fiduciary, but investment growth will be needed to counter the loss of purchasing power to inflation and to take care of increasing family needs.
The future is uncertain, but your fiduciary has the experience to maintain an investment performance that will attempt to offset those events that affect your estate. The estate plan that you and your asset manager developed will provide the guidelines for the management of your estate.
The capability of providing special needs to family members is an importance benefit of establishing an estate plan. The care of an elderly relative and the education of children and grandchildren are a few examples of what an estate plan can provide.
A trust can also be an instrument to withhold control of their inheritances from your beneficiaries until they reach a certain age. The trustee will follow whatever plan you set out in your trust document.
What about your business? Can unnecessary business taxes be avoided? Yes. By establishing an appropriate estate plan, you can ensure that your closely held business can be transferred without unnecessary taxes. Again the asset manager can help put a plan in place that will accomplish this.
Professional help is essential to make certain you take advantage of available cost savings when you transfer the ownership of your business.
One last point about planning for business succession: Do it now to avoid any unanticipated events.
Joseph Wojcik, CPA, MT, is senior vice president and regional executive for Sky Bank, Stark and Summit counties. Reach him at (330) 258-2360, Akron; (330) 498-4623, Canton.
An adviser should have appropriate levels of education, professional qualifications, experience (typically at least five years handling investment accounts for clients) and technical competence. You may want to ask business associates and friends for recommendations, and check references.
Interview the individual and ask about his or her investment philosophy and specialties. Find out how many clients the adviser handles, as well as how much money the average client invests.
You should feel comfortable that the firm's style, as well as that of the individual representative, matches your own in order to develop a mutually beneficial relationship.
Choose a manager who has consistent performance over long time periods. Focusing on historical performance is a classic error in choosing a money manager. Studies have shown that the top-performing manager in one period typically underperforms in the next.
The industry's rule of thumb is to compare returns over at least the past five years in different periods to assess the manager over a complete market cycle.
However, this is only a sound predictor of skill if the investment philosophy, process and personnel of a firm are the same over the period the track record was established. Confirm that key personnel are still in place.
Additionally, a good investment counseling firm is convinced of its style and security selections and will not change its approach for the wrong reasons, such as pressure from clients and consultants to perform better. A firm with a goal of long-term growth may not perform as well in a declining market, while investors who are seeking "value" tend to perform better in this environment.
Making a change could be a major mistake, since it could be made at the point where the market moves the other direction.
Research lets an adviser construct a logical, thoughtful investment strategy. Inquire about the amount of research, the frequency and the type.
Ask if the firm performs its own research or uses an outside source. It should provide you with data sources, including the source of historical data used to perform useful analyses.
It's important that you understand exactly how your investment adviser is compensated. There are basically two types of compensation: fee-based and commission-based.
Fee-based managers typically charge an annual fee based on account value. Commission-based managers typically charge a commission based on the investments purchased. Whichever approach you choose, be sure you are receiving value for the fee or commission you are paying.
Also, determine whether an adviser's performance data includes the impact of fees charged to clients, as well as whether he or she receives compensation from anyone other than clients.
An adviser should provide an accountability of your portfolio with detailed reports, preferably quarterly but at least annually. Good reporting provides you more information and a better understanding, helping you make informed decisions.
Your portfolio's return should be compared to an index that is an appropriate measure for the type of portfolio you have. Ask to review a sample copy of reporting before selecting an adviser. How to reach: Frank Wojcik, senior portfolio manager, Fifth Third Bank, (614) 233-4413 or firstname.lastname@example.org