Simple is Better

Jeff RauppJeff Raupp, CFA, Senior Investment Manager, Brinker Capital

Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains. ~Steve Jobs

If you can’t explain it simply, you don’t understand it well enough. ~Albert Einstein

As an aspiring young basketball player in my pre-teens, I was fortunate enough to have my dad coach my township basketball team. When watching him draw up and teach a play for our team to execute, I decided I, too, could design a play for us. I guess I had always been a bit of an analytic. I went home and proceeded to design what might have been the most complex play ever developed, involving multiple players setting multiple picks, variations depending on how the defense reacted, and multiple passes that required each player’s timing to be nothing less than perfect. I proudly showed it to my dad. He appropriately praised me for the effort and then, to my dismay, declined to implement it Play Callingat the next practice. Naturally, I bothered him incessantly about it, as only kids can do, until he finally sat me down and walked through the play. He pointed out that while on paper the play looked great, if the execution or timing was even slightly off for any of the players, the entire thing broke down. As a team, we were still grappling with the idea of executing a simple pick and roll, so a play this complex was destined for failure. For our basketball team, simple was better.

Years later, I have found this lesson to be applicable in so many cases, particularly in investing. When you think of all the factors that can affect returns—economic factors, geopolitical issues, company specific factors, investor sentiment, government regulation, etc.—the tendency is to think that to be successful in such a complex environment you need to come up with a complex solution. Like my basketball play, complex investment solutions can often look great on paper, but fail to deliver.

I’ve interviewed hundreds, if not thousands of investment managers covering any asset class you can imagine. One of the things I’ve learned over the years is that if I can’t walk out of that interview with a good understanding of the key factors that will make their product successful and how that will help me, I’m better off passing on the strategy.

An instance that stands out to me is the time I visited a manager where we discussed an immensely elaborate strategy that tracked hundreds of factors to find securities that they believed were attractive. We visited the floor where the portfolio was managed by computing firepower and a collection of PhDs that rivaled NASA. You really couldn’t help but be impressed by the speed at which their systems could make decisions on new data and execute trades, and the algorithms they used to optimize their inputs used just about every letter in the Greek alphabet.

Raupp_Simple_3.28.14_1The conversation then went towards discussing how all of this translates to performance and it hit me—all of this firepower didn’t produce a result that I couldn’t get elsewhere from cheaper, less-complex strategies. So while I could appreciate all the work that went into putting the strategy together, I had a hard time seeing how the end results helped our investors. I felt that in creating an intellectually impressive structure, the firm had lost sight of the bottom line—delivering results to their investors.

This isn’t to say that all complex investment strategies aren’t worthwhile. We use many in our portfolios and over the years they’ve added significant value. We spend a lot of time analyzing the types of trades and opportunities that these managers look for and use. But I’ve found that if I can’t step back and articulate why I’d use a strategy in three or four bullet points, I’m better off walking away.

Most of the time you’re better off with the simple pick and roll.

The views expressed are those of Brinker Capital and are for informational purposes only.

Show and Tell: Five Points to Make with Prospects

Sue Bergin@SueBergin

The best storytellers are the ones that have mastered the art of “show, don’t tell.” Their ghost stories, for example, have descriptions of settings and physical manifestations of emotions. Sentences like “it was a scary place,” serve only to punctuate what the reader or listener already concluded.

The same can be said of advisors. Telling someone that you can help them achieve their financial goals does not make nearly as big of an impact as when you show them how.

The following are five areas where it is important to show clients why you are the best choice.

Five Points to Make with Prospects:

  1. How you will organize their financial lives. While most clients don’t come out and admit it, their financial lives are chaotic. They may not know how many assets they truly have and how they can put them all to work to increase purchasing power. The first step for advisors is to show clients the before and after. Explain to them what they currently have now versus what their potential growth may look like. Demonstrate how you will make them feel more in control of their financial lives. It could be something as simple as taking out your iPad and showing them the client portal of wealth management tools.
  2. 6.11.13_Bergin_Show&TellHow you will help them make good investment decisions. The term “good investment decisions” is too opaque to resonate with clients. Instead, walk clients through the process used to create an Investment Policy Statement (IPS). Talk to the client about how an IPS helps to guide future decisions. In the recent Brinker Barometer, we learned that 72% of advisors use a written IPS to help clients make non-emotional investment decisions when the market is in flux. The IPS is tangible proof of a disciplined process that will benefit the client.
  3. What you do to ensure that clients get the best advice and service possible. Marketing-darling phrases like independent, objective and unbiased, fall flat. Instead, describe the process that you go through to ensure that your recommendations are appropriate for the need you are trying to solve.
  4. You have been there, done that. Your experience does not speak for itself. You have to give it a voice. If you just say, “I have been an advisor 22 years,” you miss the opportunity to highlight what you have seen throughout your career. It is more impressive to learn that you have helped others thrive in all market climates than to know that you’ve been at this for a while.
  5. You appreciate their business. It’s easy to say “I value your business,” but to convey that message through action takes a concerted effort. Personal touches such as the just-checking-in phone calls, handwritten notes, and occasional invitations to social events let clients know that their business and their well-being matter to you.

Reading The Fine Print – Part Two

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

In part one of my blog post, I discussed how important it is to read the fine print when selecting the right managers. “Things are not always what they seem, and by doing a little bit of digging, you can unearth some red flags that hopefully help you make a more educated decision, or at least ask the right questions.”

I left you with three warning signs of sorts that I’ve run into throughout my years of selecting investment managers:

  • Backtested numbers
    When you take a particular portfolio, or a process, and ask, “How would this have performed over a certain time period?”—that’s backtesting. There’s merit in doing this, but you really have to be careful on the value you place on the data. Anyone can build a portfolio that looks great using backtested data. If it’s a portfolio of mutual funds, just pick the ones that did the best. If it’s a quantitative model or a tactical model, just pick the algorithm that worked the best. You’ll never see a backtested quantitative or tactical model that doesn’t have a good outcome in recent markets.Not surprisingly, I have yet to come across a quantitative or tactical portfolio that has performed in actuality as well as it performed in backtesting. A backtest is good for telling you how the strategy would perform in various markets to help develop your expectation levels, but should not be used to decide if the strategy adds value.
  • Seed Accounts
    4.26.13_Raupp_FinePrint_2Firms will often start seed or model accounts to get a track record of performance started. These typically have little or no client assets and are often funded entirely by firm assets. While the firm can make the claim that they’ve been running money that way for a number of years, the reality was that their clients didn’t experience the front end of that.There are a few risks in play here. The firm could have run multiple seed accounts, discarding the ones that didn’t work and promoting the one that did. The objective itself or the universe of eligible securities may have changed before the strategy was offered to clients. As with backtested numbers, there is value in looking at seed performance, but if the backbone of a strategy’s pitch is great performance in 2008 and there were minimal assets that benefited, you have to ask, “Why?” Would the firm make the same decisions with billions of client assets that they did with $100,000 of seed capital?
  • Merged Track Records
    When firms combine, or merge products, often from multiple track records comes one track record. Ideally, the track record from the product that was most reflective of the surviving product would be used, but, more likely, the best track record will be the one that wins out. Knowing whether the track record is reflective of the current team, process and philosophy is vital.

Whenever you look at the performance of an investment strategy, you should always give careful consideration of exactly what you’re looking at. Reading through the disclosure is a necessity, as is asking questions about things that are unclear. The fine print can often help you make more educated decisions of where to invest.

Reading The Fine Print – Part One

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

While at a carnival a few months back, our ten-year-old daughter entered my wife into a “contest” to win a free ocean cruise, unbeknownst to us. A few weeks and many soliciting phone calls later, we realized we had an opportunity for a teaching point on reading the fine print. While the picture on the entry box for the contest certainly looked appealing, with a handsome couple sunbathing by clear, blue Caribbean waters, the reality was that “winning” the contest gave you one free cruise—while accompanied by another adult paying full price, meals and transportation to point of departure not included, other fees may apply. And, if that wasn’t the kicker enough, your entry meant that you agreed to be solicited by the sponsoring firm. Oh, and you had to sit through a presentation while on the cruise.

The lesson? Often when something seems too good to be true, it is. Before buying/entering/joining something, make sure that you know what you’re getting into. In other words, read the fine print!4.26.13_Raupp_FinePrint

This is advice I’ve found extremely valuable in the investment management industry when selecting investment managers. Things are not always what they seem, and by doing a little bit of digging, you can unearth some red flags that hopefully help you make a more educated decision, or at least ask the right questions. Disclosures, often ignored, are invaluable when analyzing the performance of a strategy you’re considering.

Here are a few situations I’ve run into:

  • Backtested Numbers
  • Seed Accounts
  • Merged Track Records

Look out for my second post next week as I go deeper into these scenarios!