CAN YOU EXPLAIN YOUR PORTFOLIO IN LESS THAN 30 SECONDS?

I met with a client yesterday to review the outside investment accounts that she recently inherited, held at the investment division of a local bank. They weren’t bad, I told her, I’d certainly seen worse. The “advisor” fees were too high, and the expenses on the mutual funds were also too high. But there were no annuities, and fortunately, the bank didn’t have their own mutual funds (proprietary funds are always a red flag).

As I flipped through the statement pages, however, the thing that stood out to me was how complicated the portfolio was! There were a few dozen mutual funds and exchange-traded funds (ETFs) covering lots of different stock, bond, and “alternative” asset classes. I was going to ask her what she thought, but I realized I barely had a grasp on the portfolio myself, and I’m a CFA charter holder! Even with time spent researching these holdings, the likelihood I could get to the bottom of the actual fees (including internal fund trading/turnover) and taxes was remote. I’d have to ask DFA for an allocation analysis to get a basic handle on the portfolio’s overall small-cap and value exposure.

Instead, I turned her attention to her Servo portfolio. As an example of what I thought was a better way to invest, I pointed out that we could probably review her holdings in less than 30 seconds!

• She had a low cost, well-diversified, 65/35 mix of stocks and bonds.
• 40% was in a fund that bought all the stocks in the US market, with an emphasis on smaller and more value-oriented companies (for higher potential returns).
• 25% was in a fund that bought all the stocks outside the US, also with an emphasis on smaller and more value-oriented stocks.
• The stock funds were “tax-aware” to minimize unnecessary capital gains distributions and higher tax dividends.
• The 35% in fixed income was in an “investment grade” corporate/government bond fund in her IRA and a tax-free municipal bond fund in her taxable account.

I was glad I had kept this plan straightforward. I think it made it easier for my client to understand and appreciate what she owned. It certainly made it easier to relate it to her long-term growth, income, and legacy goals.

A lot of advisors worry that if you make an investment portfolio too simple, a client might ask, “what do I need you for”? But in my experience, nobody wants investment complexity. If you can get to about the same place with fewer holdings—which results in lower fees and greater tax efficiency—why not do it?

An essential part of a successful investment experience is understanding what you own and why you own it. Portfolio complexity makes that practically impossible.

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