Wealth management: advice from a former banker

In our previous letter we developed a decision support approach to answer the question “annuity or capital”, for the exit of pension assets from your second pillar. In this edition we develop our views on the approach to use to organize the management of your capital, both for assets resulting from pension provision and for your entire movable assets.

Indeed, investing your money requires rigor and discipline, even if you entrust its management to a third party. And this is particularly relevant in –inevitable– phases where financial markets experience significant instability, like today. It is in these moments that emotions often take over the discipline that every good investor must demonstrate, leading to decisions that can be disastrous about the long-term returns of your portfolio.

Start by clearly defining your risk profile

In finance “free lunch” does not exist! The rule is always the same: for a high return expectation there is an equally high level of risk. If someone promises you something else, avoid them, because they are either incompetent or a scammer. Building your profile is fundamental. It will be decisive for the performance and risks incurred for your file, more than any other investment choice that will be made in the future, in particular those relating to the selection of securities and possible tactical changes in allocation between asset classes.

From then on, your first job will be to define your “strategic” profile, that is to say the structure of your long-term investments. This is an exercise that all banks engage in when opening a relationship and which will lead to an allocation grid between risky and high-yielding assets (typically stocks) and more “quiet” investments (typically government bonds). In Banks, this profile is generally established on the basis of a questionnaire which combines factual elements (for example, the time horizon) with emotional elements (typically “what is your reaction in the event of a sudden drop in the markets?”)

At Impact-FE we consider that this approach does not have enough depth given the importance of clearly defining your profile. We prefer a detailed analysis of the future financing needs of the person concerned, carried out within the framework of a detailed financial plan.

Choose between active management and passive management

Let us first clarify that “passive management” means an approach that more or less replicates the composition of the benchmarks in your portfolio. For example, a portfolio of Swiss stocks will have a very large proportion of Nestlé, Roche and Novartis shares, because these stocks are heavyweights in the Swiss Market Index. By “active management” we mean an approach where your manager selects securities on the basis of his real investment convictions with, of course, the objective of generating a higher return than that of the benchmark indices.

This choice also poses more philosophical questions: do you want to finance the economy through the mechanisms of financial markets or are you content with a role of “follower”? Would you like to have a more active social and environmental approach (through the application of ESG criteria)? etc. If you select passive management, you will pay particular attention to your portfolio costs (including hidden fees), as replicating a benchmark has little value.

For active management the main criterion to analyze is the talent of your manager: the latter must be able to demonstrate to you the quality of his processes, the rigor of his approach and his ability to generate good performance after costs, which are naturally higher than 'with a passive approach. To do this, you must use a long-term horizon. At least 3 years, ideally 5 years. Finally, avoid “semi-active” management, unfortunately retained by many banks. You will pay high fees while limiting your chances of “beating” the benchmarks. The worst of both worlds, in short.

Be patient

A long time horizon for judging management performance is the mother of all investment discipline. And this comment applies in two dimensions: the time horizon to judge the performance of your portfolio as a whole (because it depends on the initial timing of investments), and the time horizon necessary to judge the management performance of your manager (because it depends on the “fashion” that reigns on the Stock Exchange at a given moment). The stock market always falls much faster than it rises. This is when your negative emotions take over because it is never pleasant to see your capital evaporate.

The cycle is generally as follows: in the early stages of the decline you remain in a comfort zone (and so does your banker), but when the decline continues your discomfort increases (and that of your banker too). If the decline continues you end up “breaking down”, often at the worst time. At this point, you will sell all or part of your shares and choose a much more defensive profile (or even another Bank altogether), resulting in having “taken your losses” and then adopting an investment strategy that will take decades to regain your former capital.

Do you think you can return to the stock market “at the lowest of the markets”? Very few people have such talent, knowing that the biggest increases are generally observed in the first days of a trend reversal. In the case of an active management approach, it is simply not possible to generate a return that is better than that of the indices every year.

Specifically, the more your manager uses a belief-based approach, the greater the risk that he or she will be “very late” on the index for a given period of time. The important thing is long-term performance and not performance over one or two quarters! Therefore, choosing an active manager involves carefully analyzing your processes, your (long-term) results and your management discipline, before making the decision to work with a given establishment. And then we must stick to this decision, unless there is a structural change which would justify a reallocation to other partners.

Supervise over time

Nothing like a regular meeting with your banker to ensure the proper monitoring of your affairs. Beyond points on the evolution of the markets, their prospects, performance or even the transactions carried out, it is necessary in particular to regularly check the following elements: Does your manager remain faithful to the promised strategy? If it turns like a " weather vane" (or the staff changes), you've chosen someone who doesn't have the discipline required. Draw the consequences!

If your account is increasingly accompanied by investment funds or structured products this is often a signal to analyze closely, because such investment vehicles tend to improve margins for the Bank, but not necessarily the performance of your file. Don't hesitate to ask for

explanations and to calculate a TER (“Total Expense Ratio”), which must include the costs levied on the underlying vehicles. For any questions, do not hesitate to contact us contact contact@impact-fe.ch .