When we hire an advisor to manage our traditional portfolio of stocks and bonds, the first thing they want to know is the answer to the following two questions:
- Will you delegate full responsibility for managing your portfolio to me? or
- Will the account be co-advised, meaning, before I make a purchase or sale in your portfolio, I must consult with you?
When the owner of the portfolio chooses #1, the client and the advisor work together to design a portfolio that meets the risk tolerance of the client, the advisor constructs the portfolio and typically the advisor provides reports, usually monthly or quarterly, that inform the owner of the status of their portfolio. Additionally, the advisor’s reports include a comparison of their performance to that of their peer group.
The full process is based on the DIME method (coined by my friend Scott Morgan, author of an out-of-print book by the same title). DIME: Design, Implement, Monitor, Evaluate.
Sometimes, the owner of the portfolio chooses #1, but instead of delegating authority, monitoring the performance of the portfolio, and periodically evaluating the portfolio manager; the owner abdicates, i.e. moves on to other things and ignores the portfolio manager.
I heard a sad story from a friend recently who chose option #1, neglected the monitor and evaluate part, and didn’t discover the result until he needed the money and discovered it was gone. The advisor was not dishonest, he simply made poor investment choices.
The “portfolio managers” of our business are our leadership team, our key executives. Each business owner has a risk tolerance that leads them to be more or less involved in activities in their businesses. The result sometimes is key executives either feel micromanaged or business owners abdicate instead of delegate, only to jump back in when things are not going as they expected (but didn’t verbalize).
This seesaw drives both owners and key executives crazy and leads to outcomes neither wants. What if instead owners and key executives sat down together and asked the investment manager questions. These questions might include some of the following:
- What decisions will I have full responsibility for?
- Which decisions do you want to co-advise?
- What risks are you most concerned about?
- What kind of reporting works best for you? Written, verbal?
- What do you want to monitor, and on what frequency?
- How will my performance be evaluated?
And finally the most important question,
What is our agreement as to how to give each other feedback when the outcomes or the process didn’t go as we expected?