Porter tells potential clients that he focuses on not guessing the market by buying index funds that buy broad swaths of the market; keeping costs as low as possible, such as fewer transaction costs and not paying analyst fees; and focusing on tax efficiency, by relocating assets from tax-inefficient types of investments to tax-advantaged accounts.
For his part, Vid Ponnapalli, CFP and founder of Unique Financial Advisors, explains investment philosophy as a set of guiding principles underlying the process of choosing appropriate investments for a given situation.
For example, an advisor could describe a philosophy such as a focus on long-term investing in a globally diversified portfolio and encourage choosing only low-cost exchange-traded funds, he said.
“The advisor could also explain that his or her choice of investments depends on other factors, such as the risk tolerance, risk capacity of the investor or the current income tax situation of the investor,” Ponnapalli said.
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He added that answers to these questions will help potential clients in various ways, such as:
- Verifying if their priorities match those of the advisor.
- Becoming more aware of the risk/return relationship in investment management.
- Understanding their own risk tolerance and risk capacity.
- Being assured the advisor’s investment choices are based on a solid foundation, as opposed to a random selection.
In response to questions on investment philosophy, Shikha Mittra, CFP and president of Retire Smart Consulting, finds it more relevant to explain the overall client-facing process, not just the investment phase, per se.
For Mittra, “philosophy” relates to how she manages clients’ funds, which should be the last question to ask, she said.
“We as professionals rely on strict proven processes customized to the investor’s need,” Mittra said.
She described her basic process to provide context on where investment philosophy questions should fit in. Her first step is to determine the client’s needs, goals, risk tolerance, time frame, interests and other data to create an investment policy statement. This document would then dictate how she will manage the portfolio.
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