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The most vital question ever put to me as a portfolio adviser

  •   Dan Kemp
  •   14 September 2022
  • 2

"What are you doing with his money?"

This is the most important question I have ever been asked as a professional investor and it seems especially important in an environment where both equity and bond prices have fallen sharply. The reason this question is significant is it encapsulates core tenets of investing. Still, before we dig into these tenets, let me tell you more about the client, Terry.

Terry is a retired coalminer who has entrusted his savings to the team at an adviser that has, in turn, invested those savings in a Morningstar managed portfolio. Terry is not a typical client for this adviser but he has been with them for a long time and the team obviously cares deeply about making sure he is well looked after. Hence, we were posed this question by the adviser team when reporting on the progress of the portfolios.

Whose money?

The first element of this question that deserves our attention is the fact it is focused on a person’s money. In a world where professional investors tend to spend our time focused on index levels and percentages, comparing our returns with benchmarks and peers, it is vital to remember that we are making decisions about money.

This money has the power to transform lives for better or for worse. Our clients are ultimately unconcerned by our quartile rankings and benchmark-relative returns but are instead focused on whether they are progressing towards their financial goals and will be able to support themselves in retirement.

Aligning ourselves with this view can be challenging, especially when experiencing a valuation bubble, such as the one we have seen in technology stocks over the last couple of years. It is essential, however, if the work we do is to be of benefit to our clients and society as a whole.

As professional investors, we typically manage pools of money on behalf of a large number of investors. This pooling approach has transformed professional investment from a service that was only available to the wealthy and made it accessible to all. The drawback of pooling, however, is it is easy to forget we manage money on behalf of individuals, each of whom has a unique situation.

While we cannot know each of these investors individually, when making decisions about the portfolio, it is essential to keep in mind how these decisions will impact Terry. For our part, we summarise this approach as ‘putting the end investor first’, which forms our first and most important investment principle.

By focusing on an individual rather than a group, we can reduce the psychological distance to those we are trying to serve, which in turn can help us make better decisions on their behalf.

The future not the past

Note too that the question is not ‘What have you done with his money?’ but ‘What are you doing with his money?’ The importance of the future is implied in the question but, unfortunately, is easy to forget when working with clients.

At the recent Morningstar Investment Conference, more than two-fifths (44%) of the advisers who responded to a poll reported their clients ‘have clear financial goals we are working towards’. Yet less than one-third (30%) of advisers reported spending the majority of their client meetings focused on progress towards those goals. This is a similar proportion (31%) to those who reported spending most of their client meetings focused on markets and past performance.

We know that focusing on the past can trigger the behavioural biases that are so harmful to investors, yet we still tend to focus too much on the things we cannot change in the past and not enough on those we can influence in the future. This latter point is especially relevant in the current environment where the outlook for investment has changed significantly over the last six months and requires us to approach the future with fresh thinking.

As we do this, it is essential to have a clear mental framework for assessing opportunities and avoid being ‘whipsawed’ by changing economic and geopolitical circumstances. Within our own team, we use valuation as our guide. While this is not the only way to invest, we have found it to be the approach that is best aligned to the welfare of our end-investors and helps us avoid accepting risks that are uncompensated by higher expected returns over the long term.

Whatever approach you use yourself, I would encourage us all to remain focused on the first and most important question when making investment decisions. So what are we doing with Terry's money?


Dan Kemp is Global Chief Investment Officer at Morningstar Investment Management. This article is general information and does not consider the circumstances of any investor. This article was originally published in Portfolio Advisor on 12 August 2022. Minor modifications have been made for an Australian audience.


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Graham Wright
September 14, 2022

Well said Trevor. But let me add what I believe are the fundamental questions that work together, not singularly to manage a portfolio as well as managing most other objective motivated activities in life:
1. What am I going to do?
2. Why am I going to do it?
3. Where am I going to do it?
4. When am I going to do it.
5. Who will be involved in doing it?
6. How will I know if I am being successful or failing.
These start out as opening questions, but they lead to repeating themselves as you drill down into you project until you find the final answers describe the solution of the project you are involved in.
UH OH! Isn't this a classic problem-solving technique? And isn't the problem to build the retirement benefits for the client? How can any question be any more or less important than the rest, or exist alone, if you want to satisfy the client?

September 14, 2022

Dan Kemp , Global Chief Investment Officer at Morningstar Investment Management , you ask : ""What are you doing with his money?".....and the following is the reality of what is actually happening : "At the recent Morningstar Investment Conference, more than two-fifths (44%) of the advisers who responded to a poll reported their clients ‘have clear financial goals we are working towards’. Yet less than one-third (30%) of advisers reported spending the majority of their client meetings focused on progress towards those goals. This is a similar proportion (31%) to those who reported spending most of their client meetings focused on markets and past performance." THAT is why I opted for a SMSF.....because I needed to find someone who ACTUALLY CARED about MY interests ! Had YOU been MY FINANCIAL ADVISER I would have probably have remained in " a fund of your choosing " and done well ; regrettably , I had some "poor advisers" and did poorly ! Hence my move to a SMSF , which has , and is , doing well , together with the assistance a good stock-broker , an even better accountant and a 'supportive and understanding spouse' ! And... I get the dubious pleasure of LOTS of research ; it sure fills-in-the-time for me , so boredom is never a problem either !


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