When vetting asset management specialists, any high net worth individual, family, trust, foundation, or endowment should carefully review the person or organization’s investment process. An effective investment process should consist of various equities and fixed income instruments. A good asset manager will customize the precise allocations in order to best reflect the goals and risk tolerance of each client, as well as additional objectives and restrictions based on the client’s tax position. Private equity, real estate, and both direct and opportunistic investments can support a client’s financial needs as alternative investment tools.
Asset management firms should be prepared to embrace a wide range of technologies and digital resources to source and execute scalable solutions, from structured investment products to the latest portfolio algorithms. These resources help the team to minimize the human element, allowing for a disciplined approach to risk-adjusted returns on investment. That said, clients should not feel like they have lost custody or control of their assets at any point during the investment process.
This process can be broken down into a few basic stages. To start, the asset management and investment team should clearly define the client’s objectives. This includes understanding whether the client is pursuing short-, mid-, or long-term gains. In certain cases, clients may have a specific event or period they are working toward, such as retirement.
Over the course of establishing a client’s financial goals, investors should assess the client’s risk tolerance, as well as their return profile. Risk tolerance can be defined as the degree of risk or uncertainty the client is willing to assume with each investment, while a return profile analytically describes the client’s financial ability to withstand higher risk investments and potential losses.
Next, asset managers must determine the ideal asset allocation strategy. An optimally invested asset will strike the ideal balance between risk and reward, in line with the client’s risk tolerance and return profile.
At this point, the client and asset managers can collaborate on the development of a custom investment plan. There are several advantages to working with an investment advisor or group that prioritizes a client’s specific needs with a custom investment plan, as opposed to a one-size-fits-all investment model. The benefits range from increased flexibility to the ability to align asset allocation with highly specific tax requirements and other investment vehicles. Using the newly created investment plan, the asset management team can move forward by actively seeking investments that match the client’s goals.
As assets are invested, the investment team must actively monitor their performance. According to most industry experts, performance evaluation should occur annually, around the same time every year, though minor communications with an investment team may happen on a more frequent basis.
The performance evaluation process includes discussion regarding rebalancing investments and shifting asset allocation. This part of the investment process also includes tax loss harvesting, which involves selling an underperforming investment that is losing money. The sale allows the asset management team to mitigate a client’s taxable capital gains. Finally, the asset managers and client can review initial returns together and determine how to rebalance their strategy if necessary.
