I work for a small wealth management office and we have a good portion of smaller dollar ($250k-$1M) clients who basically take our advice no matter what as they don’t know any different. I have a co-worker who believes getting the CFA can hurt the investment performance for clients like this.
He says that he has seen in practice, where a manager gets the CFA then becomes eager to make more active investment decisions rather than relying on professionally managed mutual funds or passive funds like the manager had in the past. The client happily agrees to any investment recommendations the manager has. Since a new CFA can’t usually beat the performance of tenured fund managers, the client’s portfolio suffers, if not purely by performance then at least by alpha.
I’m wondering if any of you have seen this happen in practice. If not, do you think having the charter only further educates the manager in creating a passive strategy and allows the manager to almost always know when an active choice would be better for the client?
This doesn’t make sense, at all. Many of the tenured fund managers your friend references that manage those mutual funds, in fact, hold the CFA charter. But let’s get real, those guys are failing to beat their benchmarks at a rate equivalent to that of a coin flip as well. The CFA is only one of many factors that may “explain” investment performance. It should not be viewed in isolation. Some would argue that it shouldn’t be considered at all when looking at investment outcomes, but I don’t think that’s a sensible approach. One would not question that someone is a better doctor if they had an MD versus someone who is a medical hobbyist.
I’m willing to bet your buddy doesn’t have what it takes to complete the CFA program, am I right?
Being more active increases volatility of returns, even if expected return is random. So the lowest performing fund could very well be one with an active manager who seeks outsized risks.
Other than that, a higher frequency of trading will increase costs. So, if the manager is trying to time the market or is over tactical, his returns will suffer.
So, a small amount of investment knowledge could be bad for performance. If your friend has seen this, then there is most likely something to it.
Could be. Could also be that the client doesn’t really understand what’s going on, and therefore doesn’t know whether their performance is good or bad. For example, what is ‘good’ performance? Is good beating the Dow Jones? That’s a pretty risky portfolio for anyone over, say, 45…might want to put some bonds in there…which is going to make it pretty hard to get those ‘good returns’. Is good better than the S&P 500? well…diversifying internationally might mean you’ll outperform the S&P 500 sometimes and underperform other times.
Unfortunately, most FAs will scratch their heads over what I’ve just written…which makes it virtually impossible for them to explain any of this to their clients.
The real key here is that with clients in the $250-$1M range, you shouldn’t be hiring a CFA to make your firm unique. There’s not a lot a CFA can do, outside of building a well diversified portfolio, for these clients. And since you need to pay him/her, that’s going to raise costs for the client. I’d be much more inclined to hire someone who can build excellent financial plans and identify insurance needs…things that clients of this size actually need.
He would have a tough time passing the exams, as anyone would.
And Huskie, I totally agree as most of the clients in this range have no idea what the charter is. We have some FAs on staff, and hopefully a CFA in a few years, that serve on our firms “investment” team. The group serves some individual clients, as described in my example above, but also serves as the firm economists and works on our approved list that all of the FAs adhere to. CFAs would provide value outside of just the clients they service in this model.