Investment Consulting

Institutional-Style Management for Your Portfolio

In order to implement your wealth management plan, your investments require sound management with an eye on the long term. That is exactly what we offer you with RightPath’s investment consulting process. Using the following the steps, we design your written investment policy statement (IPS), your principle roadmap for on-going investment and portfolio decision making.

Building a Strong Foundation

We subscribe to Modern Portfolio Theory (MPT), which recommends adherence to the following principles to control risk and minimize expenses while maximizing a target return over relatively long time periods (e.g., 5–30 years). We believe that how well these steps are followed accounts for the majority of success—or failure—of your financial plan.

Risk vs. Return Based on Generic Asset Allocations [chart-based graphic]Asset Allocation
Some studies suggest that asset allocation has the most effect on a portfolio’s return—and we agree. We use a strategic approach, which factors in your tolerance for market risks, your goals, and when you want to achieve them. First, we determine how much of your portfolio should be in equities and how much should be in fixed income. The potential for return tends to increase with a greater percentage of stocks—but so does the potential for risk. We help you determine where your comfort zone lies on this chart: enough return to meet your goals but not so much risk that you can’t sleep at night.

Diversification is an extension of asset allocation. Broad diversification allows investors to benefit when different types of investments do well—and buffers against poor performance in other investments.

After identifying your stocks-to-bonds ratio, we further divide your assets:

  • between U.S. and international investments,
  • across companies of differing sizes, (e.g., “large cap” and “small cap”), and
  • across different styles (e.g., “growth” and “value”).

Make a close inspection of your current portfollio: does it contain mostly large-cap U.S. holdings with a growth style, inspite of being invested in a number of funds? If so, when large-cap U.S. growth stocks perform well, so will that portfolio; when they perform poorly, that portfolio will perform pooly. Diversification—across stocks and bonds—buffers against that risk.

Controlling Risk
Ultimately, your risk depends upon the integrity of the people handling your investments—from your financial adviser to account managers where your investments reside. Broad diversification and diligent monitoring help to reduce the risk that relying upon a single individual or firm may entail.

Minimizing Expenses
The embedded costs of investing in a particular vehicle represent another form of risk. In fact, many consider controlling costs to be the second most important factor in a portfolio’s performance. These costs can arise because of layers of administration, active trading, tax costs, and other factors. We typically place the bulk of your portfolio with managers who work to control expenses. That may be in indexed funds, for example, which often have lower expenses because they are not actively traded. Similarly, tax-managed funds save on tax-related costs. By reducing your investment expenses, we can help you to establish a less aggressive portfolio with the same target return as more expensive vehicles.

Based on these principles, your IPS will specify that your portfolio should include certain percentages of different holdings. For example, you might need 20% of large-cap U.S. value stocks and 5% of small-cap international growth stocks. Over time, as these two categories perform differently relative to each other, they will make up different percentages of your portfolio—percentages that are not specified in your IPS. In order to “get back in balance,” excesses on one category of investment are sold off and under-represented categories are purchased. This process is called rebalancing and should be conducted regularly to reduce the risk of drifting away from your target asset allocation. Of course, if your needs change, we may need to change that allocation accordingly. Those changes are handled as part of your financial planning review rather than as part of rebalancing.