facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck

Discretionary Investment Management

Hire a Professional

What is Discretionary Investment Management?

For Wealth Management clients, Five Seasons provides continuous supervision of retirement and investment accounts under management.  Aside from ongoing investment selection, this may include dynamically rebalancing client portfolios, employing tax management strategies, and utilizing tactical asset allocation, if appropriate.  As part of this process, Five Seasons:

  1.  Provides annual account review meetings with clients,
  2.  Generates quarterly position statements and semiannual performance reports for clients, and
  3.  Welcomes impromptu discussions with clients about financial market developments and how they impact the client's accounts.

The Value of Professional Investment Management

In 2002, Daniel Kahneman shared the Nobel Prize in economics for his work on behavioral finance, a fairly new field at the time that basically assumes investors act irrationally and attempts to explain market anomalies in that light.  Since then, behavioral finance has attracted a lot of attention among other researchers, the financial industry and the press.  

For example, Morningstar has started to make available "dollar-weighted" mutual fund returns in addition to total returns.  Dollar-weighted returns are a reflection of the returns the average investor actually experiences according to when they invest in, and divest from, a given fund.  The Morningstar study and several similar academic pieces find that dollar-weighted returns consistently underperform mutual funds' published total returns.

As an indication of just how costly it is for individual investors to react emotionally to market gyrations, consider a study published in recent years by Dalbar, an independent research group.  They found that equity mutual fund investors between 1986 and 2005 sacrificed as much as 77% of the returns generated by the stock markets by chasing performance at the highs and by panicking at the lows.

By studying mutual fund inflows and outflows during this time, Dalbar determined that the average stock mutual fund investor actually earned just 3.9% per year.  By contrast, an investor who bought the S&P 500 and held it through thick and thin would have earned almost 12% per year.  That could be the difference between a carefree retirement and one spent greeting at Walmart (not that there's anything wrong with working at Walmart).

The inevitable conclusion:

Individual investors hurt their own investment performance by buying high, selling low, and overtrading.

The authors of the Dalbar study concluded that it was investors' fear of losses that caused them to become most emotionally involved and so resulted in the most damaging behavior.  The key to overcoming this costly fear is to be prepared in advance.  So a financial plan based on your personal investment time horizon and monitored by an objective investment professional, can keep you feeling level-headed and on target to achieve your financial goals, through both heady and trying markets.  Human nature will never change - stock market declines will always be frightening.  But by being prepared in advance and by having an experienced professional on your side, you can keep that fear from costing you your financial dreams.

In fact, several studies have been published that highlight the value of an experienced and objective investment advisor to essentially protect investors from their own irrational, emotional selves.


The Value of an Experienced Investment Advisor

 In a recent report authored by Vanguard, chief information officer Tim Buckley has said that financial advisors can add at least 3 percentage points annually in performance for their clients by:

1. Imposing investing discipline on their clients and reinforcing saving habits,

By introducing a personalized target asset allocation for each client and by monitoring investments on an ongoing basis, Five Seasons provides you with a structured process for achieving financial success and establishes a commitment for following through.  Without a target asset allocation, you are essentially sailing the financial markets without a rudder.

2. Using the concept of "tax location" to minimize investment-related taxes,

With investments under our supervision, we may be able to optimize the tax-efficiency of your overall investment portfolio:

(a) by harvesting capital losses or postponing capital gains in taxable accounts, and/or

(b) by utilizing the concept of "asset location" to place tax-inefficient investment vehicles in tax-deferred accounts and tax-efficient vehicles in taxable accounts.

3. Keeping investment-related costs low, and

4. Rebalancing portfolios.

As different asset classes, and different investments within those asset classes, generate disparate returns through time, you will find that your portfolio asset allocation will stray from its target.  "Portfolio rebalancing" is the process of correcting this, of bringing your investment portfolio back into alignment with your target asset allocation.

Why is portfolio rebalancing important?

  1. Rebalancing lends discipline to the investment process.
  2. Rebalancing reduces overall portfolio volatility.
  3. Rebalancing in effect forces you to buy low and sell high.
  4. Rebalancing counters much of the self-destructive behavior that many investors exhibit, i.e. overconfidence, availability bias, and belief perseverance.

"When we're faced with an unknown problem - whether it's choosing a retirement plan or buying a stock - many of us are driven to seek advice from others.  It turns out that's a good instinct to follow."

- Boðaçhan Çelen, assistant professor of finance and economics at Columbia Business School