Living near food-obsessed Philadelphia makes it easy to find great places to eat. There are hidden gems and long-standing institutions for every craving imaginable. People’s tastes vary, but I’ve found that, as with a financial advisor, people value authenticity above all else.

Diners and investors both appreciate establishments that are up-front about who they are and what they do. A rustic eatery or burger bar can be just as beloved as haute cuisine. In the same vein, advisors with different investment approaches can all experience similar success.

My last post stressed the importance of a value statement. In this post, I’d like to focus on why setting an investment strategy that aligns with the values in your statement is vital.

Here are some of the most important facets to keep in mind when building investment plans with your clients.


Define and refine your approach

Your investment strategy should reflect your beliefs but also consider clients’ unique needs. Remember, the active-passive decision isn’t a binary choice, so you don’t have to sit exclusively at one table or the other.

Instead, you should work to use each effectively. This could mean different things for each client. Strike a balance that supports a client’s long-term goals without coming into conflict with the client’s risk tolerances.


Identify effective active managers

Active funds appeal to clients’ hunger for outperformance, but not all active managers are worth their salt (or, more accurately, their fees). Active managers’ success lies in their:

  • Talent: This is the manager’s ability to pick successful funds and produce a high gross alpha expectation. Apply due diligence to evaluate a manager’s performance and determine the gross alpha expectation.
  • Costs: The effect of costs is clear. Subtract them from the gross alpha expectation to determine a manager’s net alpha expectation. If that number doesn’t warrant the risk, it might be prudent to look for another manager.
  • Patience: Active managers should stick to their strategy regardless of market swings. If a manager isn’t confident in the strategy over the long term, you shouldn’t be either.

Do your homework to help ensure that any active manager you consider for your clients can satisfy all three criteria. Picking the wrong manager could threaten your long-term strategy and shake clients’ confidence in your services.


Steady the ship with passive

The more active assets in a portfolio, the more likely it’ll experience return volatility. That variability can frazzle some clients’ nerves—roller coasters simply aren’t for everyone.

Some advisors promise clients a sense of security and peace of mind. Why not carry that throughout the investment strategy? Portfolios that produce consistent returns can help keep clients’ emotions in check.

You can help deliver a smoother ride to clients by adding passive funds to a portfolio to shrink its performance distribution. Effective active-passive combinations can help you avoid volatile swings that make anxious clients want to abandon ship.


Keep combinations in balance

Ensure that your active-passive combinations are attuned to each client’s wants and needs. Consider using low-cost index funds or ETFs to capture world market beta at the core; then select active managers to complement the core investments and reach for outperformance.

Strike a balance that carefully considers clients’ goals and risk tolerances; then lay out a road map of what they can expect going forward.


Explain your technique to clients

Setting appropriate expectations early helps frame your clients’ experiences. Guiding clients through the subtleties of your strategy builds a rapport with them that can blossom into higher levels of trust, encouraging clients to stick with you through market downturns and refer your services to other investors.

If your value statement positioned you as a partner in managing clients’ wealth, seize the opportunity to invite them to the table and give them an inside look at your investment plan technique.

For clients, it’s like enjoying a tasting menu where the chef shares the inspiration, ingredients, and techniques for executing each course of a meal. Knowing the “why” and “how” behind a strategy—culinary or otherwise—enriches the experience.

But if you’re the type who tries to explain everything to your clients, be sure to tailor your message to your audience. Think of ways you can break complex strategies down into terms clients can understand. Or consider a less complex strategy that’s easy to discuss in client conversations.


Catering to clients takes time

A less complex investment approach could help in other ways too. Services beyond investment management, such as tax and estate planning, can help deepen client relationships. They can also be a substantial time commitment.

Think of a restaurant that promises a fine-dining experience. Sparkling flatware, spotless linens, and perfectly timed service require a robust and attentive staff. Failure to deliver on the finer aspects could lead to a negative review, even if the food itself is divine.

So if you position yourself to be a client’s first call for any wealth management issues, the onus is on you to find ways to make time for the client. Create an efficient investment strategy that won’t occupy the bulk of your day.

You can use low-cost passive model portfolios like ours to streamline your investment process. Not every strategy needs to be 100% made-to-order, after all. Model portfolios (log-on required) can help you obtain broad-market exposure and might even give you greater fee flexibility.


You can’t fake authenticity

Authenticity is a tenet of five-star restaurants and financial advisors alike. If you promise a certain level of service beyond investment management and fail to deliver, clients might look elsewhere—no matter how great your investment strategy is.

Whatever strategy you settle on with a client, ensure that it reflects your value statement and aligns with the type of service you promised at the onset of your relationship.


Editor’s note: The graphic originally contained in this post was removed.