Institutional Level Management
As a member of the BAM alliance we are able to purchase funds the retail investor is not able to. This differentiation of funds allows the mutual fund company to place larger and more efficient transactions that ultimately allow them to receive liquidity discounts contingent upon fund size with respect to their target securities, management style, portfolio turnover, firm culture, etc. We have a deep knowledge of markets and ways we can more efficient to reduce the costs that take away from your returns.
Ongoing Care and Maintenance
Periodic Reporting
We produce and send customized performance reports to you periodically. In addition, you receive periodic account statements, usually monthly, from your custodian which you can choose to be electronic or paper.
Explanation of Rates of Return — The Portfolio Performance Review report included in your quarterly packet will show portfolio-level rates of return for the current quarter, year-to-date, trailing one-, three-, five- and 10-year returns (when applicable), and since inception. All returns are calculated net of all fees and costs, including advisor fees.
The review reports internal rates of return and time-weighted returns. As you read your quarterly reports, it will be helpful to understand the meaning of these two different ways to calculate returns.
Internal rate of return is influenced both by the performance of your investments and the timing and size of additions and withdrawals (either in cash or in securities). If you add assets to your portfolio right before a market run-up, you benefit more from the favorable returns. This added benefit will be reflected in your internal rate of return. Conversely, if you remove assets from your portfolio before a market run-up, or if you add assets before a market drop, your internal rate of return will be lower than the time-weighted return.
Time-weighted return is a measure of portfolio performance, disregarding the effect of cash flows. Time-weighted returns are best used for performance comparisons between different money managers; between mutual funds and their appropriate benchmarks; or between your portfolio and the synthetic benchmark used for performance comparisons.
In other words, time-weighted return shows the “pure” performance of your investments (the time-weighted return of several investors over the same time period should be the same, if they all had the same funds allocated in the same ratios), while the internal rate of return depends on the performance of your investments and the effect of your contributions to and/or withdrawals from the portfolio over time.
Rebalancing
Differences in performance among the various asset classes are likely to eventually cause your portfolio’s exposure to various risk factors to deviate from the allocation guidelines established in this document. To prevent your allocation from straying too far from its stated goals, we periodically compare your portfolio allocation against targets and may, when appropriate, re-balance it back to the recommended weighting. We will typically re-balance when either of the two following events occur:
- Either the weighting of an individual asset class deviates by ±25 percent of its recommended weighting
- Or the major components within your portfolio (domestic equity, international equity, total equity, alternatives and/or total fixed income) deviate by ±5 percent (500 basis points) from those components’ target weightings
We will typically use available cash to re-balance, as this is usually the most cost-effective method. In the absence of cash flows, we may execute transactions to re-balance the portfolio. Some funds hold multiple asset classes in one fund. These funds will re-balance internally at the fund level. Income tax considerations may influence the extent or even the appropriateness of rebalancing activity.
Tax Management
Because unnecessary taxes can hurt your returns, we will manage your portfolio with attention to tax efficiency. This can be done through various tax-management techniques, including:
- Practicing proper asset location (locating assets appropriately within tax-free, tax-deferred and taxable accounts)
- Harvesting tax losses throughout the year
- Minimizing short-term capital gains
- Using tax-managed funds where appropriate
- Remaining sensitive to mutual fund distribution dates
- Implementing specific lot identification to minimize realized gains
- Maximizing the advantages when charitable giving opportunities are desired
Monitoring for tax-loss harvesting opportunities is a year-round process for two reasons. First, an investment that shows a loss in April may recover by the end of the year. If the loss is not harvested in April, it may no longer be available in December. Second, even if the loss still exists at year-end, a short-term loss in April may have become long-term by December. (Short-term losses are generally more useful to the taxpayer than long-term losses.)
In the tax-loss harvesting process, we will consider transaction costs, as well as the possible tax consequences of holding a “substitute” fund for 31 days to avoid the wash sale rule. (The IRS may disallow the deduction if the investor sells and buys two investments that are considered “substantially identical” in nature — a wash sale — within 30 days of each other.) We will use our professional judgment to set minimum amounts and percentages for trading costs as well as loss within each equity and fixed income transaction. These figures will determine when tax-loss harvesting activities are reasonably warranted within your portfolio. The percentage hurdle will be lower for less volatile asset classes such as fixed income, and higher for more volatile asset classes, such as emerging market equities, or commodities.
Ongoing Review of Investment Plan
- During our Regular Progress Meetings, we will ask you about any specific events in your life that may call for a change in your portfolio construction. For example, these events may include the birth of a child or grandchild, the death of a parent or a change in your marital status. As we learn about changes in your situation, we will reallocate your portfolio as warranted.
- We will also review changes in your portfolio that may have resulted from market movements. For example, unless your goals change, a sustained period of strong market performance may result in less need to take risk. From a total asset level that is then greater than anticipated, you may be able to increase the odds of achieving your goals by reducing the risk exposure of your portfolio going forward. Conversely, long periods of market under performance may increase your need to take risk, resulting in a higher recommended allocation to stocks and other risky assets.
- In addition to possible adjustments to your asset allocation, changes in your personal situation and/or unusual market performance may make it necessary to re-examine your cash flow requirements.
- Because such changes are difficult to evaluate directly, we will periodically update the inputs and rerun your Wealth Analysis to assist us in making our recommendations.