At Paceline, we’re big believers that a financial advisor needs to be first and foremost an investor – NOT a salesperson. Having hands-on experience managing multi-billion dollar portfolios on behalf of institutions is valuable, uncommon experience that directly informs the way Paceline approaches portfolio management. In this article, Paceline’s founder, Jeremy Bohne, lays out three critical investment lessons learned from having managed money at that scale:
You need to know what you own and why you own it
It sounds obvious, but you’d be surprised how many people don’t really understand what they’re invested in. Many advisors, too, tend to take the lazy route and just assume that index funds are sufficiently diversified as “safe” investments. But as we’ve discussed, without an in-depth analysis of your investments in their entirety, it’s easy to inadvertently end up with unintentional portfolio concentration or poor holdings.
If you’re invested in index funds, you’ve committed yourself to owning all of the financial upside of the underlying basket of securities (what is in the index), as well as all of the downside. You aren’t using an investment vehicle/fund that picks winners or avoids losers – you are indiscriminately buying one of everything.
No advisor should ever give you the answer “just trust me” when it comes to your portfolio. Interpersonal trust is a valuable trait of a successful relationship, not an investment strategy. It’s important that your advisor is always able to explain what you own and why you own it. If they can’t, it’s safe to say they either don’t understand or don’t care enough about customer service to explain it to you – both of which are pretty alarming.
Don’t take any single risk which, on its own, could ruin investment results for the whole portfolio for the year
Managing a multi-billion dollar portfolio is all about thoughtful investment analysis coupled with taking the right level of risk. And the same holds true for individual investors as well. That’s why at Paceline we pride ourselves on tailoring investment strategies to our clients’ preferred risk tolerance. At the beginning of every engagement we go through a thorough exercise to pinpoint the right level of risk for where our client is now, as well as how that level of risk will evolve over the coming years.
While an untrained advisor may tell you to “bet big” on one investment or tell you he’s investing your money in the same thing all his other clients are in, a skilled investor (and fiduciary) will make sure that investment advice is tailored to your needs and that no one particular investment will sink your portfolio. This all about developing an investment strategy that is thoughtfully crafted and well executed, not following “hot stock tips.”
When you take over managing a portfolio that was previously managed by someone else, it sometimes makes sense to sell everything and start over, and sometimes it doesn’t
In other words, if you wouldn’t construct a portfolio containing what’s currently in it, why would you keep it as is? This is especially true of people with heavily concentrated portfolios where risk is unnecessarily high. For example, if you wouldn’t go out and buy a portfolio with 75% of your wealth invested in your current employer, why does it make sense to keep it that way? It surely doesn’t, because you wouldn’t want both your source of income and majority of wealth tied to the fate of a single company.
The important nuance here that many inexperienced advisors miss is that refreshing a portfolio should NEVER be about ego. Instead, it’s about not being afraid to take a critical look at an existing investment strategy. If an advisor tells you he wants to start fresh and can’t explain why that’s in your best interest, then that should be an immediate red flag.
In most situations, there will be a combination of core positions that make sense to hold onto as well as sale candidates that should be sold and replaced with something that better aligns with your investment strategy.
Side note: Often, people ask if transferring their portfolio to a new advisor means that they will have to sell everything and incur a considerable tax bill. Almost universally, your current holdings can be transferred from your current platform to a new advisor and do not need to be sold.
As for any transactions that do take place, tax-advantaged retirement accounts like traditional IRAs and 401(k)s are only taxed upon taking withdrawals. And when it comes to repositioning holdings within taxable brokerage accounts, your advisor may recommend that this should be done over time (not all at once in the beginning) in order to spread out any tax implications rather than incurring them all in a single year.
At Paceline, we believe in a transparent investment process that leverages our institutional investment experience to serve our clients. To speak with a professional investor or to get a complimentary portfolio review, please contact us.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.