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CPD: Financial adviser investment philosophies – the why, what and how

This Best Practice CPD series is published by AdviserVoice and sponsored by Bennelong Funds Management. 

CPD_investment philosophies

Experts should have opinions

As investment markets continue their rollercoaster ride, and with many developed countries on the cusp of recession, discussions around investment philosophies have ramped up in many circles. This is understandable because, while the current economic climate may not be entirely without precedent, making sense of the way forward has certainly become more complex, and the relative merits of many common philosophies – such as active, passive, value, growth, and contrarian – are now being hotly debated.

Importantly, these discussions and debates are no longer the exclusive domain of fund managers.

Increasingly, financial advisers are recognising that they too should have an investment philosophy, not just because their clients are paying them to have an opinion on such matters, but because a well thought out adviser investment philosophy can drive business efficiencies, deeper client relationships, more effective marketing and referral activities, and more rational investment decision making. Ultimately, a robust, well-articulated investment philosophy can drive better client outcomes.

This article will act as a practical guide for advisers seeking to develop their own investment philosophy, examining:

  • the essential components of an investment philosophy
  • the benefits
  • steps to create a robust investment philosophy, and
  • client communication considerations.

What is an investment philosophy?

According to Investopedia, an investment philosophy is:

“A set of beliefs and principles that guide an investor’s decision-making process. It is not a narrow set of rules or laws, but more a set of guidelines and strategies that take into account one’s goals, risk tolerance, time horizon, and expectations”. [1]

An investment philosophy can be based on many different approaches, including:

  • the type of stocks you may invest in (e.g., value v growth)
  • actively or passively managed investments
  • the outcomes sought (growth, income, tax efficiency)
  • the approach to analysis (technical v fundamental)
  • the importance of factors
  • the importance of sustainable/responsible investing
  • portfolio construction approaches, and
  • your approach to advice (is it, for example, goals based?).

A fund manager’s investment philosophy is the set of guardrails within which investment decisions are made, now, and into the future.

Ultimately, the investment philosophy is how every fund manager ‘nails their colours to the mast’, signalling to the potential investors what they believe in and what to expect.

As an adviser, you wouldn’t dream of investing with a manager who didn’t have a clear investment philosophy, it would be too much of a risk, a leap into the unknown. A manager’s philosophy gives you clues about how likely they are to deliver on their goals, and how they may react during turbulent market times. It’s the difference between chaos and calm.

So why would a client be any different? Why would they choose an adviser without an investment philosophy?

In the words of Australian financial adviser, Justin Brand:

“An adviser without an investment philosophy is like a boat without a rudder. If your adviser doesn’t have a convincing, evidence-based set of beliefs about the markets and how to invest in them, then you risk drifting from one idea to another.” [2]

To continue reading and receive CPD points, view the original article on AdviserVoice’s website.