opinion & commentary

New Administration, Impending Rate Hike Shapes Investor Evaluation of Money Mangers

Pillar Wealth: It’s not personal… it’s policy

WALNUT CREEK, CA, December 7, 2016 /Marketwired/ – Pillar Wealth Management, LLC, a private wealth management firm to affluent families, has published a new article advising ultra-high net worth investors on how to evaluate the performance of their money manager, and ensure that decisions are based on policies and data vs. emotions and assumptions.

The article, which is available on the Pillar Wealth Management website, points out that each family’s Investment Policy Statement should clarify what is expected of money managers, and how and when the family should act if those expectations are not met.

Comments the firm’s co-founder Haitham “Hutch” Ashoo: “This is especially important in light of the Trump administration that has a different agenda to execute than the outgoing Obama administration, and because the Federal Reserve is indicating impending action on interest rates.”

In addition, the article, which is based on insights from the firm’s recently-published book The Art Of Protecting Ultra-High Net Worth Portfolios And Estates, Strategies For Families Worth $25 Million to $500 Million, further warns investors of situations in which money managers and rates of return may fool them, and advises them to focus on answering a fundamental question: is the money manager meeting and exceeding expectations?

If he or she meets the asset allocation, performance and risk criteria as laid out in the Investment Policy Statement, deciding to hire or fire is a straightforward decision.

Adds the firm’s co-founder Chris Snyder: “Many studies have revealed that over different ten-year periods, only a small percentage of money managers outperform their respective markets. Staying emotionally attached to an under-performing money manager year after year is a big mistake. By drafting a comprehensive Investment Policy Statement, families state loud and clear that managers who fail to meet or exceed expectations will not and cannot be tolerated.”

Excerpts from the article

Ultra-high net worth families should be aware of situations in which money managers and rates of return may fool them. The following hypothetical scenario illustrates this important point:

Staying emotionally attached to an under-performing money manager year after year is a big mistake.

  • A trusted friend refers a family to a money manager.
  • The family decides to invest $20 million with her.
  • At the end of year one, the investment achieves a 15 percent rate of return. During this same period, the rate of return in the equities market index was 5 percent.
  • Impressed by the money manager’s performance, at the beginning of year two, the family invests an additional $20 million with her.
  • At the end of year two, the investment achieves only a 1.6 percent rate of return. During this same period, the rate of return in the equities market index was 10 percent.
  • The family is upset with the money manager’s performance in year two, as the rate of return on their investment has fallen from 15 percent to 1.6 percent.
  • Faced with the prospect of being fired, the money manager emphatically points out that for both years she achieved an average rate of return of 8.3 percent, whereas the average rate of return in the equities market was 7.5 percent.

Based on this scenario, the family may decide to stick with this money manager since her argument seems sound. But is it really? The answer is not clear until and unless we evaluate the wealth return for this family. By the end of year two the family would have had a total of $43,688,000 with the money manager vs. what would have been $45,100,000 if they had invested in the equities market index.

Does this mean that the family should fire the money manager? The answer is yes if the goal was to outperform the equities index. However, if the goal wasn’t to outperform the equities index then there are likely other factors to consider, some of which might be:

  • How will the manager perform with the incoming Trump administration.
  • Is this the right money manager in light of the impending Federal Reserve interest rate moves.
  • How the manager’s risk/volatility compared to what was expected of her.
  • What the money manager is invested in, and whether it fit the family’s asset allocation model and expectations.
  • How the money manager’s investment strategy compares with others who invest using the same methodology.

The full text of Pillar Wealth Management’s new article is available here.




About Pillar Wealth Management, LLC
Haitham “Hutch” Ashoo and Christopher Snyder are privileged to have worked with ultra-high net worth families, some of whom attained wealth reaching $400 million, helping them achieve a positive change in their lives and finances. They cofounded Pillar Wealth Management, LLC, an independent, fee based, private wealth management firm. As their clients’ go-to advisors, they are brought in to help with investment management, strategic planning, asset allocation, risk control, and tracking of their clients’ progress towards life-goals. Their services are provided to a limited number of clients. They only accept a new client when they have determined that there is mutual admiration and respect and only if they can add substantial value to the client’s financial life. Learn more here.